August 9, 2025 • 42 mins
What would it really mean if the United States paid off its $37 trillion national debt? In this eye-opening episode, we explore the far-reaching economic consequences—from slashing interest payments and freeing up funds for education and infrastructure, to disrupting financial markets and jeopardizing investor demand for U.S. Treasuries. We’ll delve into how a sudden debt payoff could trigger higher interest rates, reduced private investment, and even economic instability, referencing economic theories like crowding out and fiscal dominance. Get ready to uncover the hidden costs of a seemingly ideal solution, featuring insights from economists and policy analysts on the delicate balance of national finance.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to beyond infographics. We know there's just so much
information flying around, especially on big economic topics like national debt,
absolutely overwhelming sometimes exactly so think of this show as well,
your personal shortcut. We try to bring clarity, maybe a
bit of humor, and really get under the skin of
these complex ideas.
Speaker 2 (00:21):
And today national debt is definitely one of those huge topics.
Speaker 1 (00:25):
It really is. We're going deep today. We're going to
unpack the honestly fascinating ways that national debt isn't just
some number you see flashed on a screen.
Speaker 2 (00:33):
Right, It's not just a spreadsheet entry. It's a real force, a.
Speaker 1 (00:37):
Powerful force shaping our economy, your finances, even what things
might look like for future generations. We want to get
past the surface level.
Speaker 2 (00:45):
Forget the quick infographic explanation. We need the why and the.
Speaker 1 (00:48):
How, precisely because it's crucial, isn't it, This idea of
national debt. It can feel so abstract, Yeah, like it's just.
Speaker 2 (00:55):
Some government thing happening, you know, miles away from our
daily lives.
Speaker 1 (00:59):
They spread out, don't they. They touch almost everything everything.
Speaker 2 (01:03):
The interest rate on your mortgage, yeah, the stability of
your investments long term, even the cost of well, every
day stuff.
Speaker 1 (01:10):
So our mission today is really to pull back that curtain,
reveal the hidden connections, the things people often overlook, and
just how significant it is when governments manage their finance
as well or sometimes not so well.
Speaker 2 (01:26):
Let's do it so. National debt. It's a term we
hear constantly, but it feels like this huge, maybe scary
number for someone listening who wants to go beyond that
basic infographic. What exactly are we talking about?
Speaker 1 (01:38):
Good place to start, because you're right, the nuance matters.
At its very core. National debt is the grand total
the accumulated amount a government owes its creditors.
Speaker 2 (01:47):
So not just one bad year of spending, not at all.
Speaker 1 (01:50):
It's the sum of all the past years where the
government spent more than it brought in. Those are the
annual budget deficits minus any years where it actually ran
a surplus. Okay, And it's really important to distinguished between
two main types. First, there's what we call publicly held debt.
Speaker 2 (02:03):
This is the money that government owes to people like
you and me, corporations, state governments, local governments, even foreign
countries or investors who bought government bonds.
Speaker 1 (02:13):
That sounds like the key one. Economically speaking, it generally
is yes.
Speaker 2 (02:18):
It represents the government's actual borrowing from the wider market,
its obligations to outside parties. That's the figure that really
impacts financial markets. And the other type, the other part,
is debt held by government accounts. This is more like
an internal IOU. It's money that government trust funds like
Social Security or Medicare here in the US have invested
(02:40):
in special government securities.
Speaker 1 (02:42):
Ah So the government owing itself basically.
Speaker 2 (02:45):
In a manner speaking, yes, one part of the government
owes another. It adds to the gross debt figure you
might see, but it's not borrowing from the public or
foreign entities. So for our deep dog today, we'll mostly
focus on that publicly held debt.
Speaker 1 (02:58):
Got it. That makes sense. So if it's built up
from deficits spending more than you take in, it kind
of sounds inherently bad, doesn't it, Like me running up
my credit card.
Speaker 2 (03:06):
That's such a common comparison, but it's actually a bit misleading.
Government borrowing isn't always a red flag no. In fact,
it's often a really fundamental tool, sometimes an indispensable one.
Governments use debt strategically, often as an economic shock absorber.
Speaker 1 (03:23):
A shock absorber, how.
Speaker 2 (03:24):
So, well, think about a major crisis, a really bad recession,
or a global pandemic like COVID nineteen, or even a
massive war like World War two. In those times, what happens.
Tax revenues collapse because the economy slows down, right, but
demands on the government explode unemployment benefits, emergency aid, healthcare spending,
(03:45):
military costs.
Speaker 1 (03:46):
Maybe, so less money coming in, way more going out exactly.
Speaker 2 (03:49):
Yeah. Now, if the government couldn't borrow at that moment,
it would face an impossible choice. Either jackup taxes right
when the economy is tanking, which would make things even worse.
Speaker 1 (03:57):
War slash essential spending. People need it the.
Speaker 2 (04:00):
Most, precisely, Neither is a good option. So borrowing bridges
that gap. It allows the government to maintain vital services,
stimulate the economy, maybe without those damaging immediate tax hikes.
Speaker 1 (04:11):
And it lets them fund things with long term benefits too, right,
like big infrastructure project.
Speaker 2 (04:16):
Absolutely, things like building roads, bridges, investing in research, things
that pay off over decades. Borrowing can make sense for
those long term investments. It's about stability and fostering future growth.
Even if current revenues aren't enough right.
Speaker 1 (04:31):
Now, So it's a tool for managing crises and investing.
Are there other reasons debt builds up?
Speaker 2 (04:37):
Well, yes, there's something economists sometimes call it deficits bias
that can creep into the political system.
Speaker 1 (04:43):
Deficits bias.
Speaker 2 (04:44):
Yeah, it often comes from disagreements between different groups in
society about spending and taxes. Everyone wants their preferred programs funded.
Speaker 1 (04:51):
But nobody wants to pay higher taxes to fund them.
Speaker 2 (04:54):
You got it. So borrowing can sometimes seem like the
politically easiest paths go. Governments say yes to spending demands
now without making the tough calls about who pays or
what gets cut.
Speaker 1 (05:06):
Immediately, tooking the can down the road essentially.
Speaker 2 (05:08):
Yeah, kind of it deferred those hard choices, but the
jet keeps accumulating. And that's actually why you see some
countries or blocks like Germany, Switzerland or the whole EU
with its stability and growth packed.
Speaker 1 (05:21):
Right, they have rules about debt level exactly.
Speaker 2 (05:23):
They put fiscal rules in place aiming for debt below
sixty percent of GDP in the EUS case, specifically to
try and counter that political temptation to just keep borrowing.
Speaker 1 (05:34):
It's really fascinating though, when you step back and think
historically the ability for governments to issue debt, it seems
so central to how modern states even formed.
Speaker 2 (05:43):
Oh, absolutely, fundamental history of public debt is incredibly deep.
It's tangled up with the rise of democracy, the development
of financial markets. It's a huge story.
Speaker 1 (05:52):
Like the Bank of England. I remember reading something about
that being a key moment.
Speaker 2 (05:55):
A revolutionary moment, truly founded in sixteen ninety four. Kings
and rulers often just defaulted. They'd suspend payments whenever they
felt like it, which made lending to the state incredibly
risky understandable, But with institutions like the Bank of England
and a parliament that actually included people who held the
government's debt, lenders started to trust the government more. They
(06:16):
believed they'd actually get paid back.
Speaker 1 (06:18):
So trust was the key ingredient.
Speaker 2 (06:20):
Huge it changed everything. Ended That pattern of constant defaults
allowed England to borrow more reliably finance its expansion.
Speaker 1 (06:29):
It was transformative, and that made government debt itself seem safer.
Speaker 2 (06:33):
Yes, public debt went from being this really risky proposition
to being seen as a relatively safe liquid investment and
that created this really important link between public finance and
private finance. How so well, if government bonds are seen
as safe, they can be used as collateral for private loans.
For example, it helped the whole financial system grow. Plus,
(06:55):
government borrowing itself, when used for things like infrastructure or defense,
actually helped fuel economic growth.
Speaker 1 (07:01):
It's not just a modern issue.
Speaker 2 (07:02):
Then.
Speaker 1 (07:02):
Are there other historical examples of really high debt?
Speaker 2 (07:05):
Oh plenty. Public borrowing goes way back, apparently even to
Greek city states two thousand years ago. But a more
recent striking example is Britain after the Napoleonic Wars run
eighteen fifteen.
Speaker 1 (07:17):
How high did their debt get?
Speaker 2 (07:19):
Over two hundred percent of GDP? Just massive? Wow?
Speaker 1 (07:22):
How did they handle that?
Speaker 2 (07:24):
They basically spent the next ninety years consistently running budget surpluses. Slowly,
painstakingly they paid it down. It shows that even enormous
debt can be managed, but it takes incredible long term
fiscal discipline.
Speaker 1 (07:36):
That definitely puts today's numbers in perspective. It's not new,
but the scale now it feels different. What are the
current global figures looking like?
Speaker 2 (07:44):
The scale is staggering today, just looking back at twenty twenty,
global government debt hit something like eighty seven point four trillion.
Speaker 1 (07:49):
Dollars eighty seven trillion.
Speaker 2 (07:51):
Yep, and that was around ninety nine percent of global GDP,
the highest share since the nineteen sixties.
Speaker 1 (07:55):
Actually, what drove that recent search the financial crisis COVID.
Speaker 2 (07:59):
Both really huge stimulus measures during the two thousand and
eight Great Recession and then absolutely massive spending globally in
response to the COVID nineteen pandemic. Necessary actions, many would argue,
but they definitely added significantly to national debts worldwide.
Speaker 1 (08:13):
Okay, so that's the global picture. What about the US specifically?
The projections sound pretty concerning.
Speaker 2 (08:19):
They are quite stark, especially long term. The projection show
federal debt held by the public climbing well basically every
single year from twenty twenty five out to twenty fifty five.
Speaker 1 (08:30):
Every year, no dips.
Speaker 2 (08:32):
Not in the current projections. No, it's expected to hit
one hundred and seven percent of GDP by twenty twenty nine.
Now that's significant because it would actually surpass the previous
historical peak, which was one hundred and six percent right
after World War.
Speaker 1 (08:43):
Two, higher than after World War Two.
Speaker 2 (08:45):
That's saying something it is, and it doesn't stop there.
The projections then show it's soaring, potentially reaching one hundred
and fifty six percent of GDP by twenty fifty five.
We're talking about a multi decade upward trajectory.
Speaker 1 (08:56):
And what does that imply about the annual budget? Are
we just running big deficits constantly?
Speaker 2 (09:00):
That's exactly what it signifies, persistently large total deficits. Over
the next thirty years. They're projected to average about six
point three percent of GDP annually.
Speaker 1 (09:11):
How does that compare historically, Well, it's more than one
and a.
Speaker 2 (09:13):
Half times the average deficit over the past fifty years,
and it's projected to keep rising, reaching maybe seven point
three percent of GDP by twenty fifty five.
Speaker 1 (09:21):
What's driving that? Is it just interest payments?
Speaker 2 (09:24):
Interest costs are a big and growing part of it. Definitely,
As a debt gets bigger, the interest payments get bigger, obviously,
but it's also driven by rising mandatory spending, particularly on
programs like Medicare and Social Security.
Speaker 1 (09:36):
The entitlement programs.
Speaker 2 (09:38):
Yes, as the population, ages and healthcare costs continue to rise,
these programs are projected to take up in ever larger
share of the budget. Assuming current logs stay the same,
it's a major structural pressure pushing the debt upwards.
Speaker 1 (09:50):
Okay, let's really unpack this then, because these aren't just
numbers on a government report. This has real world consequences, right.
It affects job prospects, investments, the services you rely on.
It really touches your life directly.
Speaker 2 (10:03):
Absolutely, it's not abstract economic.
Speaker 1 (10:05):
So stick with us because we are going deep into
exactly how this impacts you. And hey, if you're finding
beyond infographics useful for cutting through the noise on topics
like this, we'd be incredibly grateful if you took just
a second to give us a five star rating on
whatever platform you're listening on.
Speaker 2 (10:20):
Yeah, it really helps other people find the.
Speaker 1 (10:21):
Show it does. Thanks for that. Okay, let's get into
those immediate economic ripples, currency values, inflation, How this hits
your wallet right now? First off, that link between national
debt and the value of our currency. How tight is
that connection.
Speaker 2 (10:38):
It's a very close relationship, almost codependent. You could say,
if a country's national debt starts increasing rapidly and crucially
looks unsustainable, maybe there's no clear plan to get it
under control.
Speaker 1 (10:50):
Right, If markets lose confidence exactly.
Speaker 2 (10:53):
If investors start thinking, hmmm, this doesn't look good. Maybe
they worry about future inflation, routing the debt's value, or
justneral instability that can seriously weaken the nation's currency.
Speaker 1 (11:04):
Why does that happen? People just sell the currency pretty much.
Speaker 2 (11:07):
It signals a lack of fiscal discipline. Investors lose confidence
in holding that currency or assets denominated in it. They
might start moving their money out. That's capital flight, which
further pushes the currency value down.
Speaker 1 (11:21):
Okay, so high debt can lead to a weaker currency.
What does that mean practically? For trade, imports and exports?
Speaker 2 (11:27):
It has a direct impact often quite quickly, think about it.
If your currency gets stronger relative to.
Speaker 1 (11:34):
Others, imports become cheaper for US.
Speaker 2 (11:36):
Right, you can buy more foreign goods with your dollars
or pounds or euros. But the flip side is your
exports become more expensive for.
Speaker 1 (11:43):
Foreigners, making them less competitive.
Speaker 2 (11:45):
Correct. Now, if your currency weakens, maybe because of high
debt concerns, the dynamic flips, imports suddenly become much more
expensive for your citizens. Ouch. Yeah, but your exports become
cheaper for foreign buyers, which could potentially boost export sales.
Speaker 1 (12:00):
So a weak currency isn't all bad for trade.
Speaker 2 (12:02):
It can sometimes help the trade balance by making exports
more attractive, but it usually comes at the cost of
those higher import prices, which, as we'll see, feeds right
into domestic inflation. It's a very tricky balance.
Speaker 1 (12:15):
And that connection to inflation and interest rates, that's where
it really bites, isn't it. How does a weak currency
translate to higher prices and loan costs for us?
Speaker 2 (12:24):
That's exactly where it hits home. A weak currency almost
always fuels inflation, especially if your country imports a lot
of stuff raw materials, energy, consumer goods.
Speaker 1 (12:35):
Because those imported goods just cost more in our currency.
Speaker 2 (12:39):
Precisely, you have to pay more of your weaker currency
to buy them. That's imported inflation. And when inflation starts
rising like that, what does the central bank usually do?
Speaker 1 (12:48):
They raise interest rates.
Speaker 2 (12:48):
They raise interest rates. They do that to try and
cool down the economy, curve borrowing and spending and hopefully
put a lid on inflation. It's also done to support
the currency itself, to stop it from falling further.
Speaker 1 (12:59):
And if the cur and see strong, a strong.
Speaker 2 (13:01):
Currency generally helps keep inflation down because imports are cheaper.
But the key takeaway here is that high national debt
tends to push upward on both inflation and interest rates.
Speaker 1 (13:11):
And those interest rates that's my mortgage, my car.
Speaker 2 (13:14):
Loan, your mortgage, car loan, credit card rates, even the
interest you earn on savings, though that's often slow to
catch up. It means the cost of borrowing goes up
across the board, making big purchases more expensive and just
squeezing household budgets.
Speaker 1 (13:29):
That definitely feels tangible. How does this ripple out into
the job market then, and our overall ability to get ahead?
Speaker 2 (13:36):
Well, high national debt eats up the government's financial flexibility.
When a huge chunk of the budget has to go
just to paying interest on past.
Speaker 1 (13:44):
Borrowing, there's less money for other things, exactly.
Speaker 2 (13:47):
Less money for things that can directly create jobs, like
building infrastructure, roads, bridges, green energy projects, or funding for
small businesses or investing in scientific research. Those kinds of
public investments often get squeezed.
Speaker 1 (14:01):
So fewer government funded job.
Speaker 2 (14:03):
Opportunities potentially, Yes, And when you combine a potentially tighter
job market with those higher interest rates we just talked about,
it dampens overall spending power for both consumers and businesses.
Speaker 1 (14:15):
People are more cautious, businesses maybe hold off on expanding, right.
Speaker 2 (14:18):
It makes it harder for people to find good jobs,
harder for businesses to grow, and that sluggishness can actually
further weaken the currency. If the economic outlook dims, it
can become a bit of a negative cycle.
Speaker 1 (14:31):
Can you give us a concrete example, maybe how this
plays out in a specific market like housing.
Speaker 2 (14:37):
Yeah, real estate is a really interesting example. Imagine a
country where the currency is weakening, maybe due to high debt.
Foreign buyers who have stronger currencies suddenly find that country's
property market looks like a bargain.
Speaker 1 (14:50):
Because their money goes further they get an automatic discount.
Speaker 2 (14:52):
Exactly, so they might start buying up property, especially in
major cities, which pushes prices up. Domestic buyers then find
themselves compared heating against people with this built in purchasing
power advantage. It can make home ownership much less affordable
for locals.
Speaker 1 (15:07):
Wow, I hadn't thought of that direct link.
Speaker 2 (15:09):
And even if you're not directly competing with foreign buyers,
the broader effects bite a weak currency might make imported
building materials more expensive, construction slows down rentals supply my
titan because investment seems riskier. It all connects, so it.
Speaker 1 (15:25):
Really underscores the need for a stable economy, managed debt.
Speaker 2 (15:28):
Absolutely, a strong economy boosts jobs, grows national wealth, helps
keep interest rates manageable, and makes things more equitable internally
while also creating better trade opportunities globally. It's all interconnected.
Speaker 1 (15:40):
Okay, the immediate impacts are clear and quite concerning. Let's
broaden the view now to the long term Part three,
investments overall growth and this really big idea of generational responsibility.
How do those currency swings we discussed affect my investment
portfolio over say ten or twenty years.
Speaker 2 (15:59):
They can have a really significant impact over the long haul.
It depends on where you're invested. Of course. If your
home currency is weakening over time, like depreciating, right, depreciating,
that can actually be good for domestic companies that export
a lot. Their goods become cheaper for foreigners, potentially boosting
their sales and profits, which could make their stock more attractive.
Speaker 1 (16:19):
Okay, so a potential upside there.
Speaker 2 (16:22):
But that same weak currency makes imported goods more expensive.
That includes things like machinery or components that businesses need
to invest and expand, So it can actually hurt domestic
investment by raising costs.
Speaker 1 (16:35):
At double edged sword.
Speaker 2 (16:37):
Definitely. And if you hold investments overseas, say in stocks
or bonds denominated in a foreign currency, a weaker home
currency means those foreign assets are worth more when you
convert them back. That boosts your returns.
Speaker 1 (16:48):
But if I'm a foreign investor holding assets in the
country with the weakening currency.
Speaker 2 (16:51):
Then your returns get eroded when you convert back to
your home currency. So yeah, it adds a whole layer
of complexity. Diversification becomes really key for long term investors.
Dealing with currency risk makes sense.
Speaker 1 (17:03):
And what about the bigger picture a nation's overall economic
growth trajectory? How does managing debt well or poorly affect
that long term?
Speaker 2 (17:13):
A government that's seen as fiscally responsible, that keeps its
debt under control and avoids those unsustainable spirals, that reputation
for stability is incredibly valuable.
Speaker 1 (17:25):
Why does it attract investment?
Speaker 2 (17:27):
Absolutely, it makes the country's currency look more attractive, more stable.
Both domestic and foreign investors feel more confident putting their
capital to work their long term. They look for predictable environments.
Speaker 1 (17:39):
Less risk of inflation or sudden policy shifts.
Speaker 2 (17:42):
Precisely, prudent debt management signals lower risk, which encourages businesses
to invest, innovate, and expand. It really is a two
way street. High uncontrolled debt tends to weigh down a
currency and scare off investment over time, while responsible management
generally supports the currency and attracts.
Speaker 1 (17:59):
Capital and that under lying economic health. That's what allows
for good healthcare, education, all those things.
Speaker 2 (18:04):
Fundamentally, yes, accessible healthcare, good job opportunities, strong education systems,
social safety nets. All of these rely on a healthy,
growing economy. And that economic health is deeply intertwined with
how a nation manages its financial obligations. Over the long run,
responsible fiscal policy is the bedrock.
Speaker 1 (18:25):
Okay, so let's get specific about the US outlook. Given
those projections we talked about, what are the main long
term consequences of large and growing federal debt that we
really need to be aware of.
Speaker 2 (18:36):
One of the biggest concerns among economists is a gradual
slowing of overall economic growth. It's not always dramatic year
to year, but it adds up.
Speaker 1 (18:44):
How does high debt slow growth.
Speaker 2 (18:46):
It's largely through this effect called crowding out. When the
government borrows heavily year after year, it's competing for funds
in the same capital markets that businesses use to borrow
for investment.
Speaker 1 (18:57):
So the government's borrowing pushes up the price of borrowing
for everyone else.
Speaker 2 (19:00):
Essentially, yes, it tends to drive up real interest rates
the cost of borrowing after accounting for inflation. That makes
it more expensive for private companies to finance new factories,
R and D technology upgrades, you name it.
Speaker 1 (19:14):
Less private investment means.
Speaker 2 (19:15):
Less private investment means workers end up with fewer or
less advanced tools and resources. Over time, that leads to
slower productivity growth, which ultimately translates into slower wage growth
and a lower overall standard of living than we might
have had otherwise. It's an accumulating drag.
Speaker 1 (19:31):
That's a serious, long term drag. What about all the
interest we have to pay, especially to foreigners holding US debt.
Speaker 2 (19:38):
That's another major consequence. As the total debt grows, the
interest payments naturally grow too, and a significant chunk of
US debt currently around the third is held by foreign investors,
Foreign government central banks, So a lot.
Speaker 1 (19:50):
Of that interest money flows out of the US exactly.
Speaker 2 (19:53):
Those payments go broad That directly reduces what we call
our national income. It's money leaving the US economy that
could otherwise have been spent or invested here. It's a
leakage that gets bigger as the debt gets bigger.
Speaker 1 (20:05):
And does carrying all this debt make the country more
vulnerable to shocks?
Speaker 2 (20:10):
Definitely significantly more vulnerable. A large existing debt makes the
nation much more sensitive to unexpected rises in interest rates.
How So, think about it. If interest rates go up globally,
or if markets suddenly get nervous about the US fiscal
situation and demand higher rates, the cost of servicing that
massive pile of debt and skyrocket almost overnight.
Speaker 1 (20:32):
Even a small rate increase on trillions of dollars.
Speaker 2 (20:34):
Means billions, potentially hundreds of billions in extra interest payments
each year. That puts immense pressure on the federal budget,
forcing really tough choices cut spending elsewhere, raised taxes or
borrow even more, potentially creating a dangerous debt spiral. It
reduces resilience.
Speaker 1 (20:50):
That sounds like it could edge towards well a crisis
is a full blown fiscal crisis a real risk for
a major economy like the US.
Speaker 2 (20:58):
The risk certainly increases as debt levels climb. A fiscal
crisis is essentially when investors, domestic and foreign, just lose confidence.
They suddenly doubt the government's ability or willingness to handle
its debt.
Speaker 1 (21:09):
What happens then panic selling.
Speaker 2 (21:11):
It can trigger panic. You could see an abrupt, sharp
spike in interest rates as investors demand huge premiums to
hold the debt. This could cause massive losses for banks,
pension funds, insurance companies, anyone holding lots of government bonds.
Speaker 1 (21:26):
Potentially freezing up the financial system.
Speaker 2 (21:28):
It could It could lead to a credit crunch, bank failures,
a deep economic contraction. Given the US dollars global role,
a US fiscal crisis would have devastating ripple effects worldwide.
Speaker 1 (21:40):
How likely is that though.
Speaker 2 (21:41):
Most economists think the risk of that kind of acute
crisis for the US is relatively low in the near term.
But and this is a big but, market confidence can
be fragile. It can change very quickly, sometimes unexpectedly. High
debt definitely increases that underlying vulnerability. Even if a crisis
isn't imminent today.
Speaker 1 (22:00):
So even if we avoid a big meltdown, are there other,
maybe slower negative.
Speaker 2 (22:04):
Effects, Yes, there are. Even without a crisis, Persistently high
and rising debt can gradually erode confidence. You might see
a slow decline in the value of US assets as
investors demand higher returns or look elsewhere.
Speaker 1 (22:16):
Higher inflation expectations.
Speaker 2 (22:17):
Maybe that too. If people start expecting the government might
eventually inflate away the debt, those expectations themselves can push
prices up and critically for the US, there's the risk
to the dollar status as the world's main reserve currency.
Speaker 1 (22:30):
Losing that status would be a big deal.
Speaker 2 (22:32):
Huge It would make borrowing more expensive for the US
government and US companies. It would reduce America's influence in
the global economy. It makes financing everything harder and.
Speaker 1 (22:43):
Does all this debt tie policymakers' hands make it harder
to respond to new problems?
Speaker 2 (22:49):
Absolutely, it severely constrains their options. Imagine another big recession hits,
or a major natural disaster requires massive federal aid, or
a new international threat emerges.
Speaker 1 (22:59):
Where does the money come from exactly?
Speaker 2 (23:01):
If the government is already deep in debt, its ability
to respond effectively is limited. The choices become much harder,
borrow even more, potentially spooking markets, raise taxes during a downturn,
cut other essential programs. High debt means less flexibility, fewer
options when you need the most.
Speaker 1 (23:18):
Okay, this is where it gets really profound. I think
moving beyond the economics into the ethics almost this isn't
just about budgets. It's about what we leave behind, this
idea of an intergenerational transfer. Can you unpack that? What
does this debt mean for my kids or their kids?
Speaker 2 (23:35):
This is a really crucial and maybe the most ethically
charged dimension. When the government borrows today, it generally allows
the current generation us to enjoy either lower taxes or
more government services, or both than we would if the
budget were balanced. We get the benefit now, We get
the benefit now, But who eventually has to pay back
that principle and interest future generations They inherit that obligation.
Speaker 1 (23:59):
Through higher tax or fewer services for them, likely.
Speaker 2 (24:02):
Some combination of both. They bear the burden of the
borrowing that funded our current consumption or services. So government
debt is fundamentally a transfer of resources from the future
to the present.
Speaker 1 (24:12):
And reducing debt that reverses the transfer exactly.
Speaker 2 (24:17):
If we reduce debt, we're run surpluses. We're essentially leaving
future generations with a stronger physical position, potentially a larger
capital stock due to more investment, and thus perhaps a
higher standard of living. We're making a choice about the
economic legacy we leave behind, and we should remember too.
Speaker 1 (24:35):
The official debt number doesn't even tell the whole story, right,
What about things like social Security and Medicare?
Speaker 2 (24:41):
That's a hugely important point. The gross debt figures usually
don't include the massive unfunded liabilities associated with major entitlement programs.
Speaker 1 (24:50):
Unfunded liabilities meaning promises we've made but haven't set aside
the money for precisely.
Speaker 2 (24:55):
Based on current projections and laws, programs like Medicare and
Social Security are face enormous long term short falls. We're
talking trillions of dollars over the next seventy five years,
maybe thirty seven trillion dollars for Medicare, thirteen trillion dollars
for social Security based on some estimates trillions. These are
commitments made to future retirees and seniors that, under current policy,
(25:17):
the government won't have enough dedicated revenue to fully cover
that adds another enormous layer of future burden on top
of the explicit debt we've been discussing. It's like a
hidden debt.
Speaker 1 (25:27):
Wow, that really puts the long term challenge into perspective.
Speaker 2 (25:31):
Okay, if you're finding this deep dive into the realities
of national debt insightful and maybe a little sobering, please
do take that moment to give beyond Ifographics a five
star review. It truly helps us reach more listeners.
Speaker 1 (25:44):
We really appreciate the support we do.
Speaker 2 (25:46):
All right, Part four, Let's tackle some myths and get
a clearer picture of the real risks. First, big one,
the government budget is just like a household budget. You
hear this all the time, true or false.
Speaker 1 (25:57):
Mostly false. It's a really common analogy, but economist can
really find it deeply misleading.
Speaker 2 (26:01):
Why what are the key differences?
Speaker 1 (26:03):
Several huge ones. First, and most fundamentally, a sovereign government
that issues its own currency like the US, the UK
Japan can at least theoretically create more money to pay
its debts denominated in that currency. I definitely can't print
money to pay my mortgage exactly.
Speaker 2 (26:20):
Households and businesses don't have that power. Second, Governments usually
borrow much more cheaply than individuals or companies. Lenders see
them as less risky.
Speaker 1 (26:30):
Partly because they can raise taxes.
Speaker 2 (26:32):
Right, governments can increase their income through taxation within limits.
Of course, households have much less control over their income.
And third, governments have an effectively infinite lifespan, an indefinite
planning horizon.
Speaker 1 (26:45):
We don't, so the whole framework is different. The main
risk isn't going broke like a household.
Speaker 2 (26:50):
Mind, for a government issuing its own currency, the primary
risk of borrowing too much isn't usually outright default in
the way we think of it for a person. It's
more often inflame, the value of the currency declining, caused
by excessive money creation or loss of confidence. That's the
key macroeconomic distinction.
Speaker 1 (27:08):
Okay, so default risk If it's not the main risk
for the US, how real is it for governments? Generally?
History is full of defaults, isn't it.
Speaker 2 (27:15):
It absolutely is. Spain defaulted multiple times back in the
sixteenth and seventeenth centuries, the Confederacy defaulted, Revolutionary Russia repudiated
Czaris debts.
Speaker 1 (27:25):
It happens, but less likely if you control your own currency.
Speaker 2 (27:28):
Much less likely in terms of nominal default because again
theoretically they can always create the needed currency units to
make the payment. The value might plummet, but the payment
can technically be.
Speaker 1 (27:38):
Made, so who is at risk of default?
Speaker 2 (27:40):
Though? This risk free idea definitely doesn't apply to cities
or states within a country, they can't print money, and
it doesn't apply to countries in a currency union like
the Eurozone members. Greece couldn't just print euros to pay
its debts. That was a huge part of their crisis.
I see for major economy like the US, with its
own currency and the capacity to pay, a default would
(28:01):
almost certainly have to be a deliberate political choice like
failing to raise the debt sealing, not an economic necessity.
The Constitution even seems to forbid questioning the debt's validity.
Speaker 1 (28:12):
Interesting. Okay, let's focus on inflation risk then, since that
seems more relevant. How does government debt management actually cause inflation?
Speaker 2 (28:19):
It often happens through something called debt monetization or related
concepts like quantitative easing or QE if it goes too
far or is done improperly.
Speaker 1 (28:27):
Monetization meaning the central bank basically prints money to buy
the government's debt.
Speaker 2 (28:33):
Essentially yes, If the central bank buys large amounts of
government bonds, either directly or indirectly, it injects new money
into the banking system. This increases the overall money supply, and.
Speaker 1 (28:45):
If there's more money chasing the same amount of goods.
Speaker 2 (28:47):
Prices tend to go up. That's inflation. Now. QE during
a crisis might be aimed at stabilizing markets or lowering
long term rates, but if it becomes a routine way
to finance government spending, the inflation risk becomes very real.
Speaker 1 (29:01):
Is there a classic historical example of this going badly wrong?
Speaker 2 (29:04):
The most extreme and famous cautionary tale is Weimar Germany
in the early nineteen twenties hyperinflation exactly after World War One.
Facing huge reparations and domestic debt, the government resorted to
just printing astronomical amounts of money. The currency became utterly
worthless almost overnight. People needed wheelbarrows of cash to buy bread.
Speaker 1 (29:24):
The total economic collapse, total collapse.
Speaker 2 (29:26):
It destroyed savings, shattered society. It's the textbook example of
why uncontrolled money printingy to finance government obligations is so
dangerous and why central bank independence is considered so important.
Speaker 1 (29:40):
A stark reminder. Okay, one more risk exchange rate risk
for foreigners. If I'm say Japanese, and I buy a
US Treasury bond, what's my specific risk?
Speaker 2 (29:49):
So for an American buying that bond, it's seen as
free from default risk in dollar terms, But for you,
the Japanese investor, you face.
Speaker 1 (29:58):
Exchange rate risk, meaning the dollar might fall against the end.
Speaker 2 (30:01):
Precisely, if the dollar weakens against the end between when
you buy the bond and when you get paid back
or sell it, your returning yen will be lower than
you expected. You get fewer en back for your dollars.
Speaker 1 (30:11):
So my actual return depends on the exchange rate.
Speaker 2 (30:14):
Correct. That's a risk the domestic holder doesn't face. Now,
Sometimes the governments try to eliminate this risk for foreign
lenders by issuing debt denominated in a foreign currency like
the US dollars.
Speaker 1 (30:24):
Why would they do that to attract.
Speaker 2 (30:26):
Foreign investment, maybe get lower interest rates. But if they
do that, the borrowing government then takes on the exchange
rate risk itself. And crucially, they can't inflate away the
value of debt that's denominated in someone else's currency.
Speaker 1 (30:38):
So they shift the risk onto themselves.
Speaker 2 (30:41):
Yes, and it's quite common. A huge portion of debt
issued by developing countries, for instance, has historically been denominated
in US dollars. For this very reason, lenders prefer the
safety of the dollar.
Speaker 1 (30:53):
Fascinating. Okay, this sets us up perfectly for our final section,
Part five, A real thought experiment. What if? What if
the US national debt just disappeared, vanished overnight poof?
Speaker 2 (31:05):
It's a really intriguing scenario. On the surface, the immediate
benefits seem obvious and incredibly appealing, almost utopian.
Speaker 1 (31:13):
What would those benefits be let's recap.
Speaker 2 (31:14):
Well, first, you'd likely see a huge jump in the
national saving rate. The government stops soaking up all that capital.
That should lead to lower real interest rates across the economy.
Because there's less competition for loadable funds.
Speaker 1 (31:25):
Lower rates mean more investment see exactly.
Speaker 2 (31:28):
Cheaper borrowing encourages businesses to invest more in equipment, technology, buildings,
what economists call capital formation over time that makes workers
more productive, boosts wages, and leads to a higher standard
of living.
Speaker 1 (31:42):
Okay, Benefit one, more investment, higher growth. What else?
Speaker 2 (31:45):
Benefit two? No more massive interest payments from the government
that frees up a huge amount of federal revenue, which.
Speaker 1 (31:51):
Could be used for tax cuts, new spending.
Speaker 2 (31:54):
Either or both big tax cuts, new investments in education
or infrastructure, scientific research, Lots of possibilities, all potentially boosting
the economy or improving public services. It removes a major
budget constraint.
Speaker 1 (32:07):
Makes sense any others?
Speaker 2 (32:08):
Yeah. Thirdly, it could significantly reduce the US current account deficit,
the gap between what we import and export. Essentially, with
less need for foreign money to buy US debt, capital
flows might rebalance. US assets might become less attractive to foreigners,
foreign assets more attractive.
Speaker 1 (32:24):
To Americans, helping the external position potentially.
Speaker 2 (32:27):
Yes. And finally, as we discussed, eliminating the debt would
be a massive shift in generational equity. Future generations would
be freed from the burden of paying off our past borrowing.
They inherit a clean slate fiscally speaking.
Speaker 1 (32:41):
Okay, that all sounds fantastic. Higher savings, lower rates, more investment,
freedop revenue, better trade balance, fairness to future generations. Where's
the catch? Because there has to be a catch, right,
Nothing's ever that simple.
Speaker 2 (32:54):
You are absolutely right to be suspicious. This is where
the thought experiment gets really revealing. Wiping out the national
debt debt would actually create some enormous, potentially destabilizing problems
for the financial system. The biggest one is often called
the benchmark asset problem.
Speaker 1 (33:09):
Benchmark asset? What does that mean? In plain English?
Speaker 2 (33:12):
US? Treachery Bonds the debt we just notionally eliminated are
basically the foundation, the bedrock for pricing almost every other
financial asset in the world.
Speaker 1 (33:20):
The ultimate safe investment exactly.
Speaker 2 (33:23):
They're seen as the closest thing to a risk free asset.
Their interest rates, their yields serve as the benchmark against
which the risk and return of everything else corporate bonds, mortgages, stocks,
complex derivatives is measured.
Speaker 1 (33:38):
So if they disappeared, if.
Speaker 2 (33:40):
They vanished, that fundamental reference point is gone. It would
become much much harder to accurately price risks for all
other assets. Imagine trying to build a house without a
level or a measuring tape.
Speaker 1 (33:51):
You'd get chaos, more uncertainty, more volatility in market.
Speaker 2 (33:54):
Huge uncertainty, likely higher volatility, probably higher costs for borrowing
across the board because risk premium would be harder to judge.
Think about the Treasury yield curve the graph of interest
rates for different loan lengths. It's a key indicator used
to predict recessions, gauge inflation expectations. Losing that would be
like flying blind for financial markets.
Speaker 1 (34:12):
Wow, okay, so losing the benchmark is huge. How would
this affect everyday savers or big institutions like banks?
Speaker 2 (34:19):
The impact would be massive for regular folks. Super safe
options like US savings bonds gone. People looking for safety
would have to turn to potentially riskier or less liquid alternatives.
Speaker 1 (34:33):
And the big players banks, pension funds.
Speaker 2 (34:36):
They rely heavily on treasuries. Banks hold them to meet
liquidity requirements. Pension funds and insurance companies hold vast amounts
because they need safe, stable assets to back their long
term promises to retirees and policy holders. If treasuries disappear,
the stability of these crucial institutions could be questioned. They'd
have to scramble to find replacements, which might not be
(34:57):
as safe or as liquid.
Speaker 1 (34:59):
I reready mentioned the flight to quality during the Russian
default in ninety eight, everyone rushing into treasuries. That really
shows their role as a safe haven.
Speaker 2 (35:06):
Absolutely in any crisis, treasuries are where global capital runs
for safety. Their role is critical in stabilizing the system
during turbulent times. Take them away, and where does that
money go? What becomes the ultimate safe harbor. It's a
serious question.
Speaker 1 (35:20):
And they're used in derivatives too.
Speaker 2 (35:21):
You said yes, they're often the underlying asset for complex
financial instruments that companies use to hedge risks like changes
and interest rates. Pricing those derivatives accurately becomes much harder
without a reliable, liquid benchmark treasury market. It could make
risk management more expensive and less effective for businesses.
Speaker 1 (35:41):
Okay, another huge area the Federal Reserve. How could the
FED manage monetary policy without treasuries? Isn't buying and selling
them its main tool?
Speaker 2 (35:51):
It absolutely is. The Fed's workhorse tool is open market operations,
buying and selling US government securities to influence on the
money supply and interest rates. This whole process depends on
having a huge, deep, liquid market for those securities.
Speaker 1 (36:06):
So if that market vanished, the FED.
Speaker 2 (36:08):
Would be in a tough spot. It would have to
start intervening in other much smaller asset markets, maybe corporate bonds,
maybe mortgage backed securities.
Speaker 1 (36:15):
But wouldn't that mean the Fed is suddenly picking winners
and losers in the private market.
Speaker 2 (36:19):
That's the major concern. It could distort prices and credit
flows in specific sectors, something the FED generally tries very
hard to avoid. It wants its influence to be broad
and neutral. Operating in smaller markets could politicize its actions,
making it look like it's favoring certain industries.
Speaker 1 (36:37):
But some people think the FED could adapt, Even former
FED officials.
Speaker 2 (36:41):
Yes. Some argue it's not an insurmountable problem. They point
out that other central banks operate without such a massive
government bond market, maybe using different tools or different assets.
They might have to accept more volatility on their own
balance sheet, but they believe the core emission of managing
inflation and employment could still be achieved. It would be
a fundamental change, though, a huge change, potentially altering the
(37:04):
Fed's role and its relationship with financial markets and even politics.
It's a complex debate with no easy answers.
Speaker 1 (37:10):
And beyond a benchmark and fetishues, there's just the sheer
liquidity of the treasury market. Why is that specific quality
so important?
Speaker 2 (37:18):
Liquidity just means how easily and cheaply you can buy
or sell something in large quantities without moving the price
too much. The treasury market is arguably the most liquid
financial market in the world.
Speaker 1 (37:30):
That's good because it.
Speaker 2 (37:31):
Means investors know they can always get in er out
quickly even in a crisis. That very liquidity adds to
the safety profile. It provides immense stability to the whole system.
Trying to replicate that deep, seamless trading in any other
asset class would be incredibly difficult, maybe impossible.
Speaker 1 (37:49):
So the problem isn't just zero debt. It could even
be the market becoming too thin, not enough bonds trading exactly.
Speaker 2 (37:56):
Even just significantly paying down the debt making the market
much small and less liquid could start to cause some
of these problems. Higher transaction costs, more volatility, less effective
hedging challenges for the Fed. It's a delicate ecosystem.
Speaker 1 (38:10):
Given all these downsides to a world without treasuries, have
people seriously proposed alternatives other assets that could serve as
that benchmark.
Speaker 2 (38:18):
A few ideas get kicked around, Yeah, but they all
have their own issues. One is using derivatives like interest
rates swaps. Yeah, they're contracts based on interest rates. They exist,
there's somewhat liquid you can structure them to be almost
risk free in terms of rate movements, but they have
counterparty risks the other side of the deal defaults. They're
(38:38):
also not as easily traded as bonds, especially in a crisis.
Speaker 1 (38:42):
Okay, what else? What about bonds from those government sponsored
agencies like Fannie may or Freddie Mac. They have a
government guarantee, right.
Speaker 2 (38:49):
They have an implicit guarantee, which makes them seem pretty safe,
and they've definitely tried to position themselves as potential successors.
But there are problems. First, they carry pacific risks tied
to the housing market, not the whole economy.
Speaker 1 (39:03):
Not a general benchmark.
Speaker 2 (39:04):
Then not really. And second there's a big moral hazard issue.
If everyone believes the government will bail them out no
matter what, they might take excessive risks plus relying on
them as the benchmark could politicize housing finance even more.
Speaker 1 (39:18):
Right, any other ideas, more radical ones, Well, the.
Speaker 2 (39:21):
Most out there idea is maybe the most logical in
a weird way. The government could deliberately issue debt even
if it doesn't need the money just to maintain that liquid,
risk free benchmark market.
Speaker 1 (39:33):
So borrow money just to invest it somewhere else.
Speaker 2 (39:36):
Exactly issue treasuries to keep the market alive. Then invest
the proceeds in a diversified portfolio of private assets may
be managed independently. This preserves the benchmark and avoids default risk.
Speaker 1 (39:48):
But wouldn't that mean the government becomes a massive owner
of private companies.
Speaker 2 (39:52):
That's the huge political hurdle. It raises massive questions about
government intervention in the private economy, potential conflicts of interest,
politically motivated investments. It's a radical departure from the current system.
Even if it solves the benchmark problem, technically, it challenges
fundamental ideas about the role of government.
Speaker 1 (40:10):
Wow, so eliminating the debt sounds simple, but the reality
is incredibly complex, maybe even dangerous for the financial system
as we know it.
Speaker 2 (40:18):
It really highlights how deeply embedded government debt is in
the mechanics of modern finance. For better or worse.
Speaker 1 (40:24):
What an incredible journey today. We've really gone from the
basics of what national debt is, why it happens, through
its immediate impacts on currency, jobs, your wallet.
Speaker 2 (40:35):
To the long term effects on growth, investments, and that
crucial question of what we leave for future generation.
Speaker 1 (40:41):
And then peering into that hypothetical world without debt, only
to find a whole new set of perhaps even trickier
problems revolving around financial stability and the very structure of markets.
Speaker 2 (40:51):
I think the main takeaway, hopefully for everyone listening, is
that national debt is just so much more than a
headline number. It's not dry.
Speaker 1 (40:58):
Economics, No, it's this dynamic force. It shakes so much
of our daily lives, from loan costs to job opportunities,
and the stability of the entire global system rests on
how it's managed.
Speaker 2 (41:10):
Understanding it, even the complexities and trade offs, gives you
such a vital perspective on the news, on policy debates,
on the forces shaping your own financial future.
Speaker 1 (41:19):
So here's a final thought to leave you with. Given
everything we've discussed, the benefits of borrowing, the risks of
too much debt, the generational transfers, the surprising importance of
the debt market itself, what responsibility do we have as
informed citizens? How do we engage with these massive, long
term questions about the financial health of our nations, not
(41:40):
just for us, but for those who come after.
Speaker 2 (41:42):
That's a heavy question, but a really important one to consider.
Speaker 1 (41:45):
It really is, we sincerely hope this deep dive has
helped clarify the intricate world of national debt for you.
If you found this conversation valuable, please do give Beyond
Infographics at five star rating and maybe share it with
a friend who also likes to dig deeper.
Speaker 2 (42:00):
Your support really does help us keep exploring these big topics.
Thanks for joining us.
Welcome to beyond infographics. We know there's just so much
information flying around, especially on big economic topics like national debt,
absolutely overwhelming sometimes exactly so think of this show as well,
your personal shortcut. We try to bring clarity, maybe a
bit of humor, and really get under the skin of
these complex ideas.
Speaker 2 (00:21):
And today national debt is definitely one of those huge topics.
Speaker 1 (00:25):
It really is. We're going deep today. We're going to
unpack the honestly fascinating ways that national debt isn't just
some number you see flashed on a screen.
Speaker 2 (00:33):
Right, It's not just a spreadsheet entry. It's a real force, a.
Speaker 1 (00:37):
Powerful force shaping our economy, your finances, even what things
might look like for future generations. We want to get
past the surface level.
Speaker 2 (00:45):
Forget the quick infographic explanation. We need the why and the.
Speaker 1 (00:48):
How, precisely because it's crucial, isn't it, This idea of
national debt. It can feel so abstract, Yeah, like it's just.
Speaker 2 (00:55):
Some government thing happening, you know, miles away from our
daily lives.
Speaker 1 (00:59):
They spread out, don't they. They touch almost everything everything.
Speaker 2 (01:03):
The interest rate on your mortgage, yeah, the stability of
your investments long term, even the cost of well, every
day stuff.
Speaker 1 (01:10):
So our mission today is really to pull back that curtain,
reveal the hidden connections, the things people often overlook, and
just how significant it is when governments manage their finance
as well or sometimes not so well.
Speaker 2 (01:26):
Let's do it so. National debt. It's a term we
hear constantly, but it feels like this huge, maybe scary
number for someone listening who wants to go beyond that
basic infographic. What exactly are we talking about?
Speaker 1 (01:38):
Good place to start, because you're right, the nuance matters.
At its very core. National debt is the grand total
the accumulated amount a government owes its creditors.
Speaker 2 (01:47):
So not just one bad year of spending, not at all.
Speaker 1 (01:50):
It's the sum of all the past years where the
government spent more than it brought in. Those are the
annual budget deficits minus any years where it actually ran
a surplus. Okay, And it's really important to distinguished between
two main types. First, there's what we call publicly held debt.
Speaker 2 (02:03):
This is the money that government owes to people like
you and me, corporations, state governments, local governments, even foreign
countries or investors who bought government bonds.
Speaker 1 (02:13):
That sounds like the key one. Economically speaking, it generally
is yes.
Speaker 2 (02:18):
It represents the government's actual borrowing from the wider market,
its obligations to outside parties. That's the figure that really
impacts financial markets. And the other type, the other part,
is debt held by government accounts. This is more like
an internal IOU. It's money that government trust funds like
Social Security or Medicare here in the US have invested
(02:40):
in special government securities.
Speaker 1 (02:42):
Ah So the government owing itself basically.
Speaker 2 (02:45):
In a manner speaking, yes, one part of the government
owes another. It adds to the gross debt figure you
might see, but it's not borrowing from the public or
foreign entities. So for our deep dog today, we'll mostly
focus on that publicly held debt.
Speaker 1 (02:58):
Got it. That makes sense. So if it's built up
from deficits spending more than you take in, it kind
of sounds inherently bad, doesn't it, Like me running up
my credit card.
Speaker 2 (03:06):
That's such a common comparison, but it's actually a bit misleading.
Government borrowing isn't always a red flag no. In fact,
it's often a really fundamental tool, sometimes an indispensable one.
Governments use debt strategically, often as an economic shock absorber.
Speaker 1 (03:23):
A shock absorber, how.
Speaker 2 (03:24):
So, well, think about a major crisis, a really bad recession,
or a global pandemic like COVID nineteen, or even a
massive war like World War two. In those times, what happens.
Tax revenues collapse because the economy slows down, right, but
demands on the government explode unemployment benefits, emergency aid, healthcare spending,
(03:45):
military costs.
Speaker 1 (03:46):
Maybe, so less money coming in, way more going out exactly.
Speaker 2 (03:49):
Yeah. Now, if the government couldn't borrow at that moment,
it would face an impossible choice. Either jackup taxes right
when the economy is tanking, which would make things even worse.
Speaker 1 (03:57):
War slash essential spending. People need it the.
Speaker 2 (04:00):
Most, precisely, Neither is a good option. So borrowing bridges
that gap. It allows the government to maintain vital services,
stimulate the economy, maybe without those damaging immediate tax hikes.
Speaker 1 (04:11):
And it lets them fund things with long term benefits too, right,
like big infrastructure project.
Speaker 2 (04:16):
Absolutely, things like building roads, bridges, investing in research, things
that pay off over decades. Borrowing can make sense for
those long term investments. It's about stability and fostering future growth.
Even if current revenues aren't enough right.
Speaker 1 (04:31):
Now, So it's a tool for managing crises and investing.
Are there other reasons debt builds up?
Speaker 2 (04:37):
Well, yes, there's something economists sometimes call it deficits bias
that can creep into the political system.
Speaker 1 (04:43):
Deficits bias.
Speaker 2 (04:44):
Yeah, it often comes from disagreements between different groups in
society about spending and taxes. Everyone wants their preferred programs funded.
Speaker 1 (04:51):
But nobody wants to pay higher taxes to fund them.
Speaker 2 (04:54):
You got it. So borrowing can sometimes seem like the
politically easiest paths go. Governments say yes to spending demands
now without making the tough calls about who pays or
what gets cut.
Speaker 1 (05:06):
Immediately, tooking the can down the road essentially.
Speaker 2 (05:08):
Yeah, kind of it deferred those hard choices, but the
jet keeps accumulating. And that's actually why you see some
countries or blocks like Germany, Switzerland or the whole EU
with its stability and growth packed.
Speaker 1 (05:21):
Right, they have rules about debt level exactly.
Speaker 2 (05:23):
They put fiscal rules in place aiming for debt below
sixty percent of GDP in the EUS case, specifically to
try and counter that political temptation to just keep borrowing.
Speaker 1 (05:34):
It's really fascinating though, when you step back and think
historically the ability for governments to issue debt, it seems
so central to how modern states even formed.
Speaker 2 (05:43):
Oh, absolutely, fundamental history of public debt is incredibly deep.
It's tangled up with the rise of democracy, the development
of financial markets. It's a huge story.
Speaker 1 (05:52):
Like the Bank of England. I remember reading something about
that being a key moment.
Speaker 2 (05:55):
A revolutionary moment, truly founded in sixteen ninety four. Kings
and rulers often just defaulted. They'd suspend payments whenever they
felt like it, which made lending to the state incredibly
risky understandable, But with institutions like the Bank of England
and a parliament that actually included people who held the
government's debt, lenders started to trust the government more. They
(06:16):
believed they'd actually get paid back.
Speaker 1 (06:18):
So trust was the key ingredient.
Speaker 2 (06:20):
Huge it changed everything. Ended That pattern of constant defaults
allowed England to borrow more reliably finance its expansion.
Speaker 1 (06:29):
It was transformative, and that made government debt itself seem safer.
Speaker 2 (06:33):
Yes, public debt went from being this really risky proposition
to being seen as a relatively safe liquid investment and
that created this really important link between public finance and
private finance. How so well, if government bonds are seen
as safe, they can be used as collateral for private loans.
For example, it helped the whole financial system grow. Plus,
(06:55):
government borrowing itself, when used for things like infrastructure or defense,
actually helped fuel economic growth.
Speaker 1 (07:01):
It's not just a modern issue.
Speaker 2 (07:02):
Then.
Speaker 1 (07:02):
Are there other historical examples of really high debt?
Speaker 2 (07:05):
Oh plenty. Public borrowing goes way back, apparently even to
Greek city states two thousand years ago. But a more
recent striking example is Britain after the Napoleonic Wars run
eighteen fifteen.
Speaker 1 (07:17):
How high did their debt get?
Speaker 2 (07:19):
Over two hundred percent of GDP? Just massive? Wow?
Speaker 1 (07:22):
How did they handle that?
Speaker 2 (07:24):
They basically spent the next ninety years consistently running budget surpluses. Slowly,
painstakingly they paid it down. It shows that even enormous
debt can be managed, but it takes incredible long term
fiscal discipline.
Speaker 1 (07:36):
That definitely puts today's numbers in perspective. It's not new,
but the scale now it feels different. What are the
current global figures looking like?
Speaker 2 (07:44):
The scale is staggering today, just looking back at twenty twenty,
global government debt hit something like eighty seven point four trillion.
Speaker 1 (07:49):
Dollars eighty seven trillion.
Speaker 2 (07:51):
Yep, and that was around ninety nine percent of global GDP,
the highest share since the nineteen sixties.
Speaker 1 (07:55):
Actually, what drove that recent search the financial crisis COVID.
Speaker 2 (07:59):
Both really huge stimulus measures during the two thousand and
eight Great Recession and then absolutely massive spending globally in
response to the COVID nineteen pandemic. Necessary actions, many would argue,
but they definitely added significantly to national debts worldwide.
Speaker 1 (08:13):
Okay, so that's the global picture. What about the US specifically?
The projections sound pretty concerning.
Speaker 2 (08:19):
They are quite stark, especially long term. The projection show
federal debt held by the public climbing well basically every
single year from twenty twenty five out to twenty fifty five.
Speaker 1 (08:30):
Every year, no dips.
Speaker 2 (08:32):
Not in the current projections. No, it's expected to hit
one hundred and seven percent of GDP by twenty twenty nine.
Now that's significant because it would actually surpass the previous
historical peak, which was one hundred and six percent right
after World War.
Speaker 1 (08:43):
Two, higher than after World War Two.
Speaker 2 (08:45):
That's saying something it is, and it doesn't stop there.
The projections then show it's soaring, potentially reaching one hundred
and fifty six percent of GDP by twenty fifty five.
We're talking about a multi decade upward trajectory.
Speaker 1 (08:56):
And what does that imply about the annual budget? Are
we just running big deficits constantly?
Speaker 2 (09:00):
That's exactly what it signifies, persistently large total deficits. Over
the next thirty years. They're projected to average about six
point three percent of GDP annually.
Speaker 1 (09:11):
How does that compare historically, Well, it's more than one
and a.
Speaker 2 (09:13):
Half times the average deficit over the past fifty years,
and it's projected to keep rising, reaching maybe seven point
three percent of GDP by twenty fifty five.
Speaker 1 (09:21):
What's driving that? Is it just interest payments?
Speaker 2 (09:24):
Interest costs are a big and growing part of it. Definitely,
As a debt gets bigger, the interest payments get bigger, obviously,
but it's also driven by rising mandatory spending, particularly on
programs like Medicare and Social Security.
Speaker 1 (09:36):
The entitlement programs.
Speaker 2 (09:38):
Yes, as the population, ages and healthcare costs continue to rise,
these programs are projected to take up in ever larger
share of the budget. Assuming current logs stay the same,
it's a major structural pressure pushing the debt upwards.
Speaker 1 (09:50):
Okay, let's really unpack this then, because these aren't just
numbers on a government report. This has real world consequences, right.
It affects job prospects, investments, the services you rely on.
It really touches your life directly.
Speaker 2 (10:03):
Absolutely, it's not abstract economic.
Speaker 1 (10:05):
So stick with us because we are going deep into
exactly how this impacts you. And hey, if you're finding
beyond infographics useful for cutting through the noise on topics
like this, we'd be incredibly grateful if you took just
a second to give us a five star rating on
whatever platform you're listening on.
Speaker 2 (10:20):
Yeah, it really helps other people find the.
Speaker 1 (10:21):
Show it does. Thanks for that. Okay, let's get into
those immediate economic ripples, currency values, inflation, How this hits
your wallet right now? First off, that link between national
debt and the value of our currency. How tight is
that connection.
Speaker 2 (10:38):
It's a very close relationship, almost codependent. You could say,
if a country's national debt starts increasing rapidly and crucially
looks unsustainable, maybe there's no clear plan to get it
under control.
Speaker 1 (10:50):
Right, If markets lose confidence exactly.
Speaker 2 (10:53):
If investors start thinking, hmmm, this doesn't look good. Maybe
they worry about future inflation, routing the debt's value, or
justneral instability that can seriously weaken the nation's currency.
Speaker 1 (11:04):
Why does that happen? People just sell the currency pretty much.
Speaker 2 (11:07):
It signals a lack of fiscal discipline. Investors lose confidence
in holding that currency or assets denominated in it. They
might start moving their money out. That's capital flight, which
further pushes the currency value down.
Speaker 1 (11:21):
Okay, so high debt can lead to a weaker currency.
What does that mean practically? For trade, imports and exports?
Speaker 2 (11:27):
It has a direct impact often quite quickly, think about it.
If your currency gets stronger relative to.
Speaker 1 (11:34):
Others, imports become cheaper for US.
Speaker 2 (11:36):
Right, you can buy more foreign goods with your dollars
or pounds or euros. But the flip side is your
exports become more expensive for.
Speaker 1 (11:43):
Foreigners, making them less competitive.
Speaker 2 (11:45):
Correct. Now, if your currency weakens, maybe because of high
debt concerns, the dynamic flips, imports suddenly become much more
expensive for your citizens. Ouch. Yeah, but your exports become
cheaper for foreign buyers, which could potentially boost export sales.
Speaker 1 (12:00):
So a weak currency isn't all bad for trade.
Speaker 2 (12:02):
It can sometimes help the trade balance by making exports
more attractive, but it usually comes at the cost of
those higher import prices, which, as we'll see, feeds right
into domestic inflation. It's a very tricky balance.
Speaker 1 (12:15):
And that connection to inflation and interest rates, that's where
it really bites, isn't it. How does a weak currency
translate to higher prices and loan costs for us?
Speaker 2 (12:24):
That's exactly where it hits home. A weak currency almost
always fuels inflation, especially if your country imports a lot
of stuff raw materials, energy, consumer goods.
Speaker 1 (12:35):
Because those imported goods just cost more in our currency.
Speaker 2 (12:39):
Precisely, you have to pay more of your weaker currency
to buy them. That's imported inflation. And when inflation starts
rising like that, what does the central bank usually do?
Speaker 1 (12:48):
They raise interest rates.
Speaker 2 (12:48):
They raise interest rates. They do that to try and
cool down the economy, curve borrowing and spending and hopefully
put a lid on inflation. It's also done to support
the currency itself, to stop it from falling further.
Speaker 1 (12:59):
And if the cur and see strong, a strong.
Speaker 2 (13:01):
Currency generally helps keep inflation down because imports are cheaper.
But the key takeaway here is that high national debt
tends to push upward on both inflation and interest rates.
Speaker 1 (13:11):
And those interest rates that's my mortgage, my car.
Speaker 2 (13:14):
Loan, your mortgage, car loan, credit card rates, even the
interest you earn on savings, though that's often slow to
catch up. It means the cost of borrowing goes up
across the board, making big purchases more expensive and just
squeezing household budgets.
Speaker 1 (13:29):
That definitely feels tangible. How does this ripple out into
the job market then, and our overall ability to get ahead?
Speaker 2 (13:36):
Well, high national debt eats up the government's financial flexibility.
When a huge chunk of the budget has to go
just to paying interest on past.
Speaker 1 (13:44):
Borrowing, there's less money for other things, exactly.
Speaker 2 (13:47):
Less money for things that can directly create jobs, like
building infrastructure, roads, bridges, green energy projects, or funding for
small businesses or investing in scientific research. Those kinds of
public investments often get squeezed.
Speaker 1 (14:01):
So fewer government funded job.
Speaker 2 (14:03):
Opportunities potentially, Yes, And when you combine a potentially tighter
job market with those higher interest rates we just talked about,
it dampens overall spending power for both consumers and businesses.
Speaker 1 (14:15):
People are more cautious, businesses maybe hold off on expanding, right.
Speaker 2 (14:18):
It makes it harder for people to find good jobs,
harder for businesses to grow, and that sluggishness can actually
further weaken the currency. If the economic outlook dims, it
can become a bit of a negative cycle.
Speaker 1 (14:31):
Can you give us a concrete example, maybe how this
plays out in a specific market like housing.
Speaker 2 (14:37):
Yeah, real estate is a really interesting example. Imagine a
country where the currency is weakening, maybe due to high debt.
Foreign buyers who have stronger currencies suddenly find that country's
property market looks like a bargain.
Speaker 1 (14:50):
Because their money goes further they get an automatic discount.
Speaker 2 (14:52):
Exactly, so they might start buying up property, especially in
major cities, which pushes prices up. Domestic buyers then find
themselves compared heating against people with this built in purchasing
power advantage. It can make home ownership much less affordable
for locals.
Speaker 1 (15:07):
Wow, I hadn't thought of that direct link.
Speaker 2 (15:09):
And even if you're not directly competing with foreign buyers,
the broader effects bite a weak currency might make imported
building materials more expensive, construction slows down rentals supply my
titan because investment seems riskier. It all connects, so it.
Speaker 1 (15:25):
Really underscores the need for a stable economy, managed debt.
Speaker 2 (15:28):
Absolutely, a strong economy boosts jobs, grows national wealth, helps
keep interest rates manageable, and makes things more equitable internally
while also creating better trade opportunities globally. It's all interconnected.
Speaker 1 (15:40):
Okay, the immediate impacts are clear and quite concerning. Let's
broaden the view now to the long term Part three,
investments overall growth and this really big idea of generational responsibility.
How do those currency swings we discussed affect my investment
portfolio over say ten or twenty years.
Speaker 2 (15:59):
They can have a really significant impact over the long haul.
It depends on where you're invested. Of course. If your
home currency is weakening over time, like depreciating, right, depreciating,
that can actually be good for domestic companies that export
a lot. Their goods become cheaper for foreigners, potentially boosting
their sales and profits, which could make their stock more attractive.
Speaker 1 (16:19):
Okay, so a potential upside there.
Speaker 2 (16:22):
But that same weak currency makes imported goods more expensive.
That includes things like machinery or components that businesses need
to invest and expand, So it can actually hurt domestic
investment by raising costs.
Speaker 1 (16:35):
At double edged sword.
Speaker 2 (16:37):
Definitely. And if you hold investments overseas, say in stocks
or bonds denominated in a foreign currency, a weaker home
currency means those foreign assets are worth more when you
convert them back. That boosts your returns.
Speaker 1 (16:48):
But if I'm a foreign investor holding assets in the
country with the weakening currency.
Speaker 2 (16:51):
Then your returns get eroded when you convert back to
your home currency. So yeah, it adds a whole layer
of complexity. Diversification becomes really key for long term investors.
Dealing with currency risk makes sense.
Speaker 1 (17:03):
And what about the bigger picture a nation's overall economic
growth trajectory? How does managing debt well or poorly affect
that long term?
Speaker 2 (17:13):
A government that's seen as fiscally responsible, that keeps its
debt under control and avoids those unsustainable spirals, that reputation
for stability is incredibly valuable.
Speaker 1 (17:25):
Why does it attract investment?
Speaker 2 (17:27):
Absolutely, it makes the country's currency look more attractive, more stable.
Both domestic and foreign investors feel more confident putting their
capital to work their long term. They look for predictable environments.
Speaker 1 (17:39):
Less risk of inflation or sudden policy shifts.
Speaker 2 (17:42):
Precisely, prudent debt management signals lower risk, which encourages businesses
to invest, innovate, and expand. It really is a two
way street. High uncontrolled debt tends to weigh down a
currency and scare off investment over time, while responsible management
generally supports the currency and attracts.
Speaker 1 (17:59):
Capital and that under lying economic health. That's what allows
for good healthcare, education, all those things.
Speaker 2 (18:04):
Fundamentally, yes, accessible healthcare, good job opportunities, strong education systems,
social safety nets. All of these rely on a healthy,
growing economy. And that economic health is deeply intertwined with
how a nation manages its financial obligations. Over the long run,
responsible fiscal policy is the bedrock.
Speaker 1 (18:25):
Okay, so let's get specific about the US outlook. Given
those projections we talked about, what are the main long
term consequences of large and growing federal debt that we
really need to be aware of.
Speaker 2 (18:36):
One of the biggest concerns among economists is a gradual
slowing of overall economic growth. It's not always dramatic year
to year, but it adds up.
Speaker 1 (18:44):
How does high debt slow growth.
Speaker 2 (18:46):
It's largely through this effect called crowding out. When the
government borrows heavily year after year, it's competing for funds
in the same capital markets that businesses use to borrow
for investment.
Speaker 1 (18:57):
So the government's borrowing pushes up the price of borrowing
for everyone else.
Speaker 2 (19:00):
Essentially, yes, it tends to drive up real interest rates
the cost of borrowing after accounting for inflation. That makes
it more expensive for private companies to finance new factories,
R and D technology upgrades, you name it.
Speaker 1 (19:14):
Less private investment means.
Speaker 2 (19:15):
Less private investment means workers end up with fewer or
less advanced tools and resources. Over time, that leads to
slower productivity growth, which ultimately translates into slower wage growth
and a lower overall standard of living than we might
have had otherwise. It's an accumulating drag.
Speaker 1 (19:31):
That's a serious, long term drag. What about all the
interest we have to pay, especially to foreigners holding US debt.
Speaker 2 (19:38):
That's another major consequence. As the total debt grows, the
interest payments naturally grow too, and a significant chunk of
US debt currently around the third is held by foreign investors,
Foreign government central banks, So a lot.
Speaker 1 (19:50):
Of that interest money flows out of the US exactly.
Speaker 2 (19:53):
Those payments go broad That directly reduces what we call
our national income. It's money leaving the US economy that
could otherwise have been spent or invested here. It's a
leakage that gets bigger as the debt gets bigger.
Speaker 1 (20:05):
And does carrying all this debt make the country more
vulnerable to shocks?
Speaker 2 (20:10):
Definitely significantly more vulnerable. A large existing debt makes the
nation much more sensitive to unexpected rises in interest rates.
How So, think about it. If interest rates go up globally,
or if markets suddenly get nervous about the US fiscal
situation and demand higher rates, the cost of servicing that
massive pile of debt and skyrocket almost overnight.
Speaker 1 (20:32):
Even a small rate increase on trillions of dollars.
Speaker 2 (20:34):
Means billions, potentially hundreds of billions in extra interest payments
each year. That puts immense pressure on the federal budget,
forcing really tough choices cut spending elsewhere, raised taxes or
borrow even more, potentially creating a dangerous debt spiral. It
reduces resilience.
Speaker 1 (20:50):
That sounds like it could edge towards well a crisis
is a full blown fiscal crisis a real risk for
a major economy like the US.
Speaker 2 (20:58):
The risk certainly increases as debt levels climb. A fiscal
crisis is essentially when investors, domestic and foreign, just lose confidence.
They suddenly doubt the government's ability or willingness to handle
its debt.
Speaker 1 (21:09):
What happens then panic selling.
Speaker 2 (21:11):
It can trigger panic. You could see an abrupt, sharp
spike in interest rates as investors demand huge premiums to
hold the debt. This could cause massive losses for banks,
pension funds, insurance companies, anyone holding lots of government bonds.
Speaker 1 (21:26):
Potentially freezing up the financial system.
Speaker 2 (21:28):
It could It could lead to a credit crunch, bank failures,
a deep economic contraction. Given the US dollars global role,
a US fiscal crisis would have devastating ripple effects worldwide.
Speaker 1 (21:40):
How likely is that though.
Speaker 2 (21:41):
Most economists think the risk of that kind of acute
crisis for the US is relatively low in the near term.
But and this is a big but, market confidence can
be fragile. It can change very quickly, sometimes unexpectedly. High
debt definitely increases that underlying vulnerability. Even if a crisis
isn't imminent today.
Speaker 1 (22:00):
So even if we avoid a big meltdown, are there other,
maybe slower negative.
Speaker 2 (22:04):
Effects, Yes, there are. Even without a crisis, Persistently high
and rising debt can gradually erode confidence. You might see
a slow decline in the value of US assets as
investors demand higher returns or look elsewhere.
Speaker 1 (22:16):
Higher inflation expectations.
Speaker 2 (22:17):
Maybe that too. If people start expecting the government might
eventually inflate away the debt, those expectations themselves can push
prices up and critically for the US, there's the risk
to the dollar status as the world's main reserve currency.
Speaker 1 (22:30):
Losing that status would be a big deal.
Speaker 2 (22:32):
Huge It would make borrowing more expensive for the US
government and US companies. It would reduce America's influence in
the global economy. It makes financing everything harder and.
Speaker 1 (22:43):
Does all this debt tie policymakers' hands make it harder
to respond to new problems?
Speaker 2 (22:49):
Absolutely, it severely constrains their options. Imagine another big recession hits,
or a major natural disaster requires massive federal aid, or
a new international threat emerges.
Speaker 1 (22:59):
Where does the money come from exactly?
Speaker 2 (23:01):
If the government is already deep in debt, its ability
to respond effectively is limited. The choices become much harder,
borrow even more, potentially spooking markets, raise taxes during a downturn,
cut other essential programs. High debt means less flexibility, fewer
options when you need the most.
Speaker 1 (23:18):
Okay, this is where it gets really profound. I think
moving beyond the economics into the ethics almost this isn't
just about budgets. It's about what we leave behind, this
idea of an intergenerational transfer. Can you unpack that? What
does this debt mean for my kids or their kids?
Speaker 2 (23:35):
This is a really crucial and maybe the most ethically
charged dimension. When the government borrows today, it generally allows
the current generation us to enjoy either lower taxes or
more government services, or both than we would if the
budget were balanced. We get the benefit now, We get
the benefit now, But who eventually has to pay back
that principle and interest future generations They inherit that obligation.
Speaker 1 (23:59):
Through higher tax or fewer services for them, likely.
Speaker 2 (24:02):
Some combination of both. They bear the burden of the
borrowing that funded our current consumption or services. So government
debt is fundamentally a transfer of resources from the future
to the present.
Speaker 1 (24:12):
And reducing debt that reverses the transfer exactly.
Speaker 2 (24:17):
If we reduce debt, we're run surpluses. We're essentially leaving
future generations with a stronger physical position, potentially a larger
capital stock due to more investment, and thus perhaps a
higher standard of living. We're making a choice about the
economic legacy we leave behind, and we should remember too.
Speaker 1 (24:35):
The official debt number doesn't even tell the whole story, right,
What about things like social Security and Medicare?
Speaker 2 (24:41):
That's a hugely important point. The gross debt figures usually
don't include the massive unfunded liabilities associated with major entitlement programs.
Speaker 1 (24:50):
Unfunded liabilities meaning promises we've made but haven't set aside
the money for precisely.
Speaker 2 (24:55):
Based on current projections and laws, programs like Medicare and
Social Security are face enormous long term short falls. We're
talking trillions of dollars over the next seventy five years,
maybe thirty seven trillion dollars for Medicare, thirteen trillion dollars
for social Security based on some estimates trillions. These are
commitments made to future retirees and seniors that, under current policy,
(25:17):
the government won't have enough dedicated revenue to fully cover
that adds another enormous layer of future burden on top
of the explicit debt we've been discussing. It's like a
hidden debt.
Speaker 1 (25:27):
Wow, that really puts the long term challenge into perspective.
Speaker 2 (25:31):
Okay, if you're finding this deep dive into the realities
of national debt insightful and maybe a little sobering, please
do take that moment to give beyond Ifographics a five
star review. It truly helps us reach more listeners.
Speaker 1 (25:44):
We really appreciate the support we do.
Speaker 2 (25:46):
All right, Part four, Let's tackle some myths and get
a clearer picture of the real risks. First, big one,
the government budget is just like a household budget. You
hear this all the time, true or false.
Speaker 1 (25:57):
Mostly false. It's a really common analogy, but economist can
really find it deeply misleading.
Speaker 2 (26:01):
Why what are the key differences?
Speaker 1 (26:03):
Several huge ones. First, and most fundamentally, a sovereign government
that issues its own currency like the US, the UK
Japan can at least theoretically create more money to pay
its debts denominated in that currency. I definitely can't print
money to pay my mortgage exactly.
Speaker 2 (26:20):
Households and businesses don't have that power. Second, Governments usually
borrow much more cheaply than individuals or companies. Lenders see
them as less risky.
Speaker 1 (26:30):
Partly because they can raise taxes.
Speaker 2 (26:32):
Right, governments can increase their income through taxation within limits.
Of course, households have much less control over their income.
And third, governments have an effectively infinite lifespan, an indefinite
planning horizon.
Speaker 1 (26:45):
We don't, so the whole framework is different. The main
risk isn't going broke like a household.
Speaker 2 (26:50):
Mind, for a government issuing its own currency, the primary
risk of borrowing too much isn't usually outright default in
the way we think of it for a person. It's
more often inflame, the value of the currency declining, caused
by excessive money creation or loss of confidence. That's the
key macroeconomic distinction.
Speaker 1 (27:08):
Okay, so default risk If it's not the main risk
for the US, how real is it for governments? Generally?
History is full of defaults, isn't it.
Speaker 2 (27:15):
It absolutely is. Spain defaulted multiple times back in the
sixteenth and seventeenth centuries, the Confederacy defaulted, Revolutionary Russia repudiated
Czaris debts.
Speaker 1 (27:25):
It happens, but less likely if you control your own currency.
Speaker 2 (27:28):
Much less likely in terms of nominal default because again
theoretically they can always create the needed currency units to
make the payment. The value might plummet, but the payment
can technically be.
Speaker 1 (27:38):
Made, so who is at risk of default?
Speaker 2 (27:40):
Though? This risk free idea definitely doesn't apply to cities
or states within a country, they can't print money, and
it doesn't apply to countries in a currency union like
the Eurozone members. Greece couldn't just print euros to pay
its debts. That was a huge part of their crisis.
I see for major economy like the US, with its
own currency and the capacity to pay, a default would
(28:01):
almost certainly have to be a deliberate political choice like
failing to raise the debt sealing, not an economic necessity.
The Constitution even seems to forbid questioning the debt's validity.
Speaker 1 (28:12):
Interesting. Okay, let's focus on inflation risk then, since that
seems more relevant. How does government debt management actually cause inflation?
Speaker 2 (28:19):
It often happens through something called debt monetization or related
concepts like quantitative easing or QE if it goes too
far or is done improperly.
Speaker 1 (28:27):
Monetization meaning the central bank basically prints money to buy
the government's debt.
Speaker 2 (28:33):
Essentially yes, If the central bank buys large amounts of
government bonds, either directly or indirectly, it injects new money
into the banking system. This increases the overall money supply, and.
Speaker 1 (28:45):
If there's more money chasing the same amount of goods.
Speaker 2 (28:47):
Prices tend to go up. That's inflation. Now. QE during
a crisis might be aimed at stabilizing markets or lowering
long term rates, but if it becomes a routine way
to finance government spending, the inflation risk becomes very real.
Speaker 1 (29:01):
Is there a classic historical example of this going badly wrong?
Speaker 2 (29:04):
The most extreme and famous cautionary tale is Weimar Germany
in the early nineteen twenties hyperinflation exactly after World War One.
Facing huge reparations and domestic debt, the government resorted to
just printing astronomical amounts of money. The currency became utterly
worthless almost overnight. People needed wheelbarrows of cash to buy bread.
Speaker 1 (29:24):
The total economic collapse, total collapse.
Speaker 2 (29:26):
It destroyed savings, shattered society. It's the textbook example of
why uncontrolled money printingy to finance government obligations is so
dangerous and why central bank independence is considered so important.
Speaker 1 (29:40):
A stark reminder. Okay, one more risk exchange rate risk
for foreigners. If I'm say Japanese, and I buy a
US Treasury bond, what's my specific risk?
Speaker 2 (29:49):
So for an American buying that bond, it's seen as
free from default risk in dollar terms, But for you,
the Japanese investor, you face.
Speaker 1 (29:58):
Exchange rate risk, meaning the dollar might fall against the end.
Speaker 2 (30:01):
Precisely, if the dollar weakens against the end between when
you buy the bond and when you get paid back
or sell it, your returning yen will be lower than
you expected. You get fewer en back for your dollars.
Speaker 1 (30:11):
So my actual return depends on the exchange rate.
Speaker 2 (30:14):
Correct. That's a risk the domestic holder doesn't face. Now,
Sometimes the governments try to eliminate this risk for foreign
lenders by issuing debt denominated in a foreign currency like
the US dollars.
Speaker 1 (30:24):
Why would they do that to attract.
Speaker 2 (30:26):
Foreign investment, maybe get lower interest rates. But if they
do that, the borrowing government then takes on the exchange
rate risk itself. And crucially, they can't inflate away the
value of debt that's denominated in someone else's currency.
Speaker 1 (30:38):
So they shift the risk onto themselves.
Speaker 2 (30:41):
Yes, and it's quite common. A huge portion of debt
issued by developing countries, for instance, has historically been denominated
in US dollars. For this very reason, lenders prefer the
safety of the dollar.
Speaker 1 (30:53):
Fascinating. Okay, this sets us up perfectly for our final section,
Part five, A real thought experiment. What if? What if
the US national debt just disappeared, vanished overnight poof?
Speaker 2 (31:05):
It's a really intriguing scenario. On the surface, the immediate
benefits seem obvious and incredibly appealing, almost utopian.
Speaker 1 (31:13):
What would those benefits be let's recap.
Speaker 2 (31:14):
Well, first, you'd likely see a huge jump in the
national saving rate. The government stops soaking up all that capital.
That should lead to lower real interest rates across the economy.
Because there's less competition for loadable funds.
Speaker 1 (31:25):
Lower rates mean more investment see exactly.
Speaker 2 (31:28):
Cheaper borrowing encourages businesses to invest more in equipment, technology, buildings,
what economists call capital formation over time that makes workers
more productive, boosts wages, and leads to a higher standard
of living.
Speaker 1 (31:42):
Okay, Benefit one, more investment, higher growth. What else?
Speaker 2 (31:45):
Benefit two? No more massive interest payments from the government
that frees up a huge amount of federal revenue, which.
Speaker 1 (31:51):
Could be used for tax cuts, new spending.
Speaker 2 (31:54):
Either or both big tax cuts, new investments in education
or infrastructure, scientific research, Lots of possibilities, all potentially boosting
the economy or improving public services. It removes a major
budget constraint.
Speaker 1 (32:07):
Makes sense any others?
Speaker 2 (32:08):
Yeah. Thirdly, it could significantly reduce the US current account deficit,
the gap between what we import and export. Essentially, with
less need for foreign money to buy US debt, capital
flows might rebalance. US assets might become less attractive to foreigners,
foreign assets more attractive.
Speaker 1 (32:24):
To Americans, helping the external position potentially.
Speaker 2 (32:27):
Yes. And finally, as we discussed, eliminating the debt would
be a massive shift in generational equity. Future generations would
be freed from the burden of paying off our past borrowing.
They inherit a clean slate fiscally speaking.
Speaker 1 (32:41):
Okay, that all sounds fantastic. Higher savings, lower rates, more investment,
freedop revenue, better trade balance, fairness to future generations. Where's
the catch? Because there has to be a catch, right,
Nothing's ever that simple.
Speaker 2 (32:54):
You are absolutely right to be suspicious. This is where
the thought experiment gets really revealing. Wiping out the national
debt debt would actually create some enormous, potentially destabilizing problems
for the financial system. The biggest one is often called
the benchmark asset problem.
Speaker 1 (33:09):
Benchmark asset? What does that mean? In plain English?
Speaker 2 (33:12):
US? Treachery Bonds the debt we just notionally eliminated are
basically the foundation, the bedrock for pricing almost every other
financial asset in the world.
Speaker 1 (33:20):
The ultimate safe investment exactly.
Speaker 2 (33:23):
They're seen as the closest thing to a risk free asset.
Their interest rates, their yields serve as the benchmark against
which the risk and return of everything else corporate bonds, mortgages, stocks,
complex derivatives is measured.
Speaker 1 (33:38):
So if they disappeared, if.
Speaker 2 (33:40):
They vanished, that fundamental reference point is gone. It would
become much much harder to accurately price risks for all
other assets. Imagine trying to build a house without a
level or a measuring tape.
Speaker 1 (33:51):
You'd get chaos, more uncertainty, more volatility in market.
Speaker 2 (33:54):
Huge uncertainty, likely higher volatility, probably higher costs for borrowing
across the board because risk premium would be harder to judge.
Think about the Treasury yield curve the graph of interest
rates for different loan lengths. It's a key indicator used
to predict recessions, gauge inflation expectations. Losing that would be
like flying blind for financial markets.
Speaker 1 (34:12):
Wow, okay, so losing the benchmark is huge. How would
this affect everyday savers or big institutions like banks?
Speaker 2 (34:19):
The impact would be massive for regular folks. Super safe
options like US savings bonds gone. People looking for safety
would have to turn to potentially riskier or less liquid alternatives.
Speaker 1 (34:33):
And the big players banks, pension funds.
Speaker 2 (34:36):
They rely heavily on treasuries. Banks hold them to meet
liquidity requirements. Pension funds and insurance companies hold vast amounts
because they need safe, stable assets to back their long
term promises to retirees and policy holders. If treasuries disappear,
the stability of these crucial institutions could be questioned. They'd
have to scramble to find replacements, which might not be
(34:57):
as safe or as liquid.
Speaker 1 (34:59):
I reready mentioned the flight to quality during the Russian
default in ninety eight, everyone rushing into treasuries. That really
shows their role as a safe haven.
Speaker 2 (35:06):
Absolutely in any crisis, treasuries are where global capital runs
for safety. Their role is critical in stabilizing the system
during turbulent times. Take them away, and where does that
money go? What becomes the ultimate safe harbor. It's a
serious question.
Speaker 1 (35:20):
And they're used in derivatives too.
Speaker 2 (35:21):
You said yes, they're often the underlying asset for complex
financial instruments that companies use to hedge risks like changes
and interest rates. Pricing those derivatives accurately becomes much harder
without a reliable, liquid benchmark treasury market. It could make
risk management more expensive and less effective for businesses.
Speaker 1 (35:41):
Okay, another huge area the Federal Reserve. How could the
FED manage monetary policy without treasuries? Isn't buying and selling
them its main tool?
Speaker 2 (35:51):
It absolutely is. The Fed's workhorse tool is open market operations,
buying and selling US government securities to influence on the
money supply and interest rates. This whole process depends on
having a huge, deep, liquid market for those securities.
Speaker 1 (36:06):
So if that market vanished, the FED.
Speaker 2 (36:08):
Would be in a tough spot. It would have to
start intervening in other much smaller asset markets, maybe corporate bonds,
maybe mortgage backed securities.
Speaker 1 (36:15):
But wouldn't that mean the Fed is suddenly picking winners
and losers in the private market.
Speaker 2 (36:19):
That's the major concern. It could distort prices and credit
flows in specific sectors, something the FED generally tries very
hard to avoid. It wants its influence to be broad
and neutral. Operating in smaller markets could politicize its actions,
making it look like it's favoring certain industries.
Speaker 1 (36:37):
But some people think the FED could adapt, Even former
FED officials.
Speaker 2 (36:41):
Yes. Some argue it's not an insurmountable problem. They point
out that other central banks operate without such a massive
government bond market, maybe using different tools or different assets.
They might have to accept more volatility on their own
balance sheet, but they believe the core emission of managing
inflation and employment could still be achieved. It would be
a fundamental change, though, a huge change, potentially altering the
(37:04):
Fed's role and its relationship with financial markets and even politics.
It's a complex debate with no easy answers.
Speaker 1 (37:10):
And beyond a benchmark and fetishues, there's just the sheer
liquidity of the treasury market. Why is that specific quality
so important?
Speaker 2 (37:18):
Liquidity just means how easily and cheaply you can buy
or sell something in large quantities without moving the price
too much. The treasury market is arguably the most liquid
financial market in the world.
Speaker 1 (37:30):
That's good because it.
Speaker 2 (37:31):
Means investors know they can always get in er out
quickly even in a crisis. That very liquidity adds to
the safety profile. It provides immense stability to the whole system.
Trying to replicate that deep, seamless trading in any other
asset class would be incredibly difficult, maybe impossible.
Speaker 1 (37:49):
So the problem isn't just zero debt. It could even
be the market becoming too thin, not enough bonds trading exactly.
Speaker 2 (37:56):
Even just significantly paying down the debt making the market
much small and less liquid could start to cause some
of these problems. Higher transaction costs, more volatility, less effective
hedging challenges for the Fed. It's a delicate ecosystem.
Speaker 1 (38:10):
Given all these downsides to a world without treasuries, have
people seriously proposed alternatives other assets that could serve as
that benchmark.
Speaker 2 (38:18):
A few ideas get kicked around, Yeah, but they all
have their own issues. One is using derivatives like interest
rates swaps. Yeah, they're contracts based on interest rates. They exist,
there's somewhat liquid you can structure them to be almost
risk free in terms of rate movements, but they have
counterparty risks the other side of the deal defaults. They're
(38:38):
also not as easily traded as bonds, especially in a crisis.
Speaker 1 (38:42):
Okay, what else? What about bonds from those government sponsored
agencies like Fannie may or Freddie Mac. They have a
government guarantee, right.
Speaker 2 (38:49):
They have an implicit guarantee, which makes them seem pretty safe,
and they've definitely tried to position themselves as potential successors.
But there are problems. First, they carry pacific risks tied
to the housing market, not the whole economy.
Speaker 1 (39:03):
Not a general benchmark.
Speaker 2 (39:04):
Then not really. And second there's a big moral hazard issue.
If everyone believes the government will bail them out no
matter what, they might take excessive risks plus relying on
them as the benchmark could politicize housing finance even more.
Speaker 1 (39:18):
Right, any other ideas, more radical ones, Well, the.
Speaker 2 (39:21):
Most out there idea is maybe the most logical in
a weird way. The government could deliberately issue debt even
if it doesn't need the money just to maintain that liquid,
risk free benchmark market.
Speaker 1 (39:33):
So borrow money just to invest it somewhere else.
Speaker 2 (39:36):
Exactly issue treasuries to keep the market alive. Then invest
the proceeds in a diversified portfolio of private assets may
be managed independently. This preserves the benchmark and avoids default risk.
Speaker 1 (39:48):
But wouldn't that mean the government becomes a massive owner
of private companies.
Speaker 2 (39:52):
That's the huge political hurdle. It raises massive questions about
government intervention in the private economy, potential conflicts of interest,
politically motivated investments. It's a radical departure from the current system.
Even if it solves the benchmark problem, technically, it challenges
fundamental ideas about the role of government.
Speaker 1 (40:10):
Wow, so eliminating the debt sounds simple, but the reality
is incredibly complex, maybe even dangerous for the financial system
as we know it.
Speaker 2 (40:18):
It really highlights how deeply embedded government debt is in
the mechanics of modern finance. For better or worse.
Speaker 1 (40:24):
What an incredible journey today. We've really gone from the
basics of what national debt is, why it happens, through
its immediate impacts on currency, jobs, your wallet.
Speaker 2 (40:35):
To the long term effects on growth, investments, and that
crucial question of what we leave for future generation.
Speaker 1 (40:41):
And then peering into that hypothetical world without debt, only
to find a whole new set of perhaps even trickier
problems revolving around financial stability and the very structure of markets.
Speaker 2 (40:51):
I think the main takeaway, hopefully for everyone listening, is
that national debt is just so much more than a
headline number. It's not dry.
Speaker 1 (40:58):
Economics, No, it's this dynamic force. It shakes so much
of our daily lives, from loan costs to job opportunities,
and the stability of the entire global system rests on
how it's managed.
Speaker 2 (41:10):
Understanding it, even the complexities and trade offs, gives you
such a vital perspective on the news, on policy debates,
on the forces shaping your own financial future.
Speaker 1 (41:19):
So here's a final thought to leave you with. Given
everything we've discussed, the benefits of borrowing, the risks of
too much debt, the generational transfers, the surprising importance of
the debt market itself, what responsibility do we have as
informed citizens? How do we engage with these massive, long
term questions about the financial health of our nations, not
(41:40):
just for us, but for those who come after.
Speaker 2 (41:42):
That's a heavy question, but a really important one to consider.
Speaker 1 (41:45):
It really is, we sincerely hope this deep dive has
helped clarify the intricate world of national debt for you.
If you found this conversation valuable, please do give Beyond
Infographics at five star rating and maybe share it with
a friend who also likes to dig deeper.
Speaker 2 (42:00):
Your support really does help us keep exploring these big topics.
Thanks for joining us.
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