European-U.S. Debt Crisis Not a Problem After All
"European Debt Crisis_____" is one of those headlines you see almost every day. You can finish the sentence yourself. It's doesn't matter what you insert. Just start with the first three words and make something up. You think I'm kidding? Try this.
If you read the financial news at all, you've probably seen variations of all this over the last year or so. What you haven't seen as much though, are similar headlines about the U.S. But never fear, the debt crisis is here.
In fact, here are two facts that came out recently that should get your mind focused on the U.S. version of what is in fact a debt crisis in the entire developed world:
1) $5.9 trillion of U.S. debt is due to be refinanced in the next five years.
2) The Fed bought 61% of all debt issued by the U.S. government last year.
The first fact has been known for a long time, but recently has gotten some coverage in the media. The point is that - depending on how you calculate the percentage - this represents over half of the U.S. debt held by the public, and it's mostly shorter-term debt. With all that's going on in Europe, even Greece has a higher percentage of its debt in longer-term bonds.
So what's the problem? Well, when it's time to re-finance that short-term debt, the chances are good that interest rates will be higher then than now. If so, it means that the government will have to budget more money to pay the interest on its debt. And right now, the government pays the interest on its debt by borrowing more money - since it doesn't have enough money coming in from taxes (its only source of revenue) to cover all its expenses. And, of course, if it borrows money, the debt increases, causing even more interest expense which the government will have to pay by - you guessed it - borrowing more money.
If you've ever wondered what the term "vicious cycle" refers to, that's certainly a good example.
As for the fairly newly discovered fact that 61% of government debt was bought by the Fed, that took a lot of folks by surprise. To listen to the government last year, you'd have thought that U.S. debt was still in demand. It seemed that every time the government auctioned off new debt, it would be sold off pretty quickly. Now it turns out that the reason it was so quickly sold was that, when there weren't sufficient buyers for the debt as offered, the Fed just swooped in and bought the debt at whatever interest rate the government was offering. So the government didn't have to raise the interest rate on its debt to get more buyers - something they would have had to do had the Fed not stepped in.
Wait! Aha! Maybe I'm just not understanding this correctly.
Come to think of it, maybe there's really no Problem #1 after all. As the government re-finances existing debt, the Fed could just step in and buy it at low interest rates, so that the government won't have to pay higher interest rates.
Yes, yes! Now I see. I've been a dunder-head who clearly doesn't understand the "science" of economics, nor the the sophisticated operations of the U.S. Treasury Department and the Federal Reserve. Why shouldn't the Fed just keep buying up U.S. treasury debt? They have all the money in the world, right? Of course they do. They just print up the money they need anytime the U.S. Treasury wants to sell its debt. No problem.
Ah, I knew there was a reason I should have taken economics and finance in college. Silly me. I try to rely on logic to understand these things. And, of course, logic tells me that a system that relies on printing up all the money that you need to run the government can't be "real." Or, more specifically, the money that can just be printed up can't be "real" money. But how can that be? The money we use - Federal Reserve Notes to be specific - works just fine. I just bought some gas and some bread with them the other day. No problem.
How could I have thought that there was any problem with just creating money out of nothing. How could I have thought that money that's created "out of thin air" might be any less "real" than, let's say, gold, that bad old money of yesteryear? It's time for me to get up to speed with this whole money thing and just accept the fact that what the government says is money IS money. Yeah, that's it.
And as for a U.S. debt crisis....
Crisis? What crisis?
European Debt Crisis Averted
European Debt Crisis Not Over
European Debt Crisis Calms Down
European Debt Crisis Heats Up Again
European Debt Crisis Headed for Next Phase
If you read the financial news at all, you've probably seen variations of all this over the last year or so. What you haven't seen as much though, are similar headlines about the U.S. But never fear, the debt crisis is here.
In fact, here are two facts that came out recently that should get your mind focused on the U.S. version of what is in fact a debt crisis in the entire developed world:
1) $5.9 trillion of U.S. debt is due to be refinanced in the next five years.
2) The Fed bought 61% of all debt issued by the U.S. government last year.
The first fact has been known for a long time, but recently has gotten some coverage in the media. The point is that - depending on how you calculate the percentage - this represents over half of the U.S. debt held by the public, and it's mostly shorter-term debt. With all that's going on in Europe, even Greece has a higher percentage of its debt in longer-term bonds.
So what's the problem? Well, when it's time to re-finance that short-term debt, the chances are good that interest rates will be higher then than now. If so, it means that the government will have to budget more money to pay the interest on its debt. And right now, the government pays the interest on its debt by borrowing more money - since it doesn't have enough money coming in from taxes (its only source of revenue) to cover all its expenses. And, of course, if it borrows money, the debt increases, causing even more interest expense which the government will have to pay by - you guessed it - borrowing more money.
If you've ever wondered what the term "vicious cycle" refers to, that's certainly a good example.
As for the fairly newly discovered fact that 61% of government debt was bought by the Fed, that took a lot of folks by surprise. To listen to the government last year, you'd have thought that U.S. debt was still in demand. It seemed that every time the government auctioned off new debt, it would be sold off pretty quickly. Now it turns out that the reason it was so quickly sold was that, when there weren't sufficient buyers for the debt as offered, the Fed just swooped in and bought the debt at whatever interest rate the government was offering. So the government didn't have to raise the interest rate on its debt to get more buyers - something they would have had to do had the Fed not stepped in.
Wait! Aha! Maybe I'm just not understanding this correctly.
Come to think of it, maybe there's really no Problem #1 after all. As the government re-finances existing debt, the Fed could just step in and buy it at low interest rates, so that the government won't have to pay higher interest rates.
Yes, yes! Now I see. I've been a dunder-head who clearly doesn't understand the "science" of economics, nor the the sophisticated operations of the U.S. Treasury Department and the Federal Reserve. Why shouldn't the Fed just keep buying up U.S. treasury debt? They have all the money in the world, right? Of course they do. They just print up the money they need anytime the U.S. Treasury wants to sell its debt. No problem.
Ah, I knew there was a reason I should have taken economics and finance in college. Silly me. I try to rely on logic to understand these things. And, of course, logic tells me that a system that relies on printing up all the money that you need to run the government can't be "real." Or, more specifically, the money that can just be printed up can't be "real" money. But how can that be? The money we use - Federal Reserve Notes to be specific - works just fine. I just bought some gas and some bread with them the other day. No problem.
How could I have thought that there was any problem with just creating money out of nothing. How could I have thought that money that's created "out of thin air" might be any less "real" than, let's say, gold, that bad old money of yesteryear? It's time for me to get up to speed with this whole money thing and just accept the fact that what the government says is money IS money. Yeah, that's it.
And as for a U.S. debt crisis....
Crisis? What crisis?
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