Do all nations have debt? Is the US debt the worst?

[DuncanK]

Originally posted by Boddington's
"A budget deficit will certainly have an effect on interest rates, but the debt itself does not have an effect."

Interest rate is the price to borrow money. Budget deficits create demand for money because the government sells securities.

After the securities are sold the demand goes back to where it was.

[Adam Smith]

Deficit = one year = flow of funds
Debt = sum of deficits = stock of funds

Clear enough?

Unless you pay down the debt you still have to finance it when the original bond matures. The demand does not go back to where it was.

[Sten Sture]

OMG, somebody needs to spend a little bit of time with a corp fin book and an economics text... but I for one am glad that at least DunK is trying.


As someone who buys US govt debt for a living, I will share this from my experiences:

I am not alarmed by the level of debt in the States. The reason I am not alarmed is because it is small relative to both our annual income (GDP) and the total value of all assets in the USA.

A lot of foreigners own our debt. #1 so what? #2 a lot of the statistically 'foreign' owners of US debt are US entities holding funds in 'foreign' countries. This is no more a big deal than a Japanese firm buying the Pebble Beach Golf Course. (they sold it a couple of years later for 1/4 what they paid for it - suckers!)

Borrowing can be a good thing. If a government has a big project, like building a highway, it is economically advantageous to borrow the funds to build the thing rather than taxing 100% of the cost right now. Borrowing allows you to initially let the total cost of the project stay in the hands of those taxpayers who will benefit from the road over time. This is the principle of matching assets and liabilities - it is best to pay for something over the course of the time that it will benefit you instead of all at once up front. Buying a house for cash is fine if you have the money, but paying for it overtime, like a rental payment, is perfectly okay, and allows you to do something else with the cash.

Borrowing on the expectation of future cash can be a good too. If you are starving, and you will die in three days, but you will be paid in seven days by someone, it probably makes sense to borrow a bit of money for food to tide you over.

Borrowing cheaply is pretty smart. If two entities can borrow money, but one can borrow it cheaper than another, it makes sense for the one who can borrow cheaper to do the borrowing. This is, in effect, the role the government has in borrowing money. If a bunch of my friends tried to borrow a billion dollars to build highway between SF and LA, we might have to pay a very high rate of interest, say 15%. But the US govy, because it has taxing authority and a decent track record of paying back debt could borrow at 4.84% for 30 years, or even 2.95% for 5 years. The interest saved by the government doing the borrowing substantially reduces the eventual cost of the highway. And because of the highway facilitating trade and commerce, government tax revenue increase, at least partially offsetting the interest expense of the project.



That should be a good little start for some folks...



Short Est Long Lithu - Noted!

[Flubber]

IN Canada we have been running federal budget surpluses for the last number of years and small bits of that have been used to pay down the debt. As long as the debt is not growing, you are " beating the debt" in any growing economy. So while we have not really reduced the debt, it is decreasing as a proportion of our GDP. Interest still eats up a good chunk of our budget but things are relatively under control



How big is the debt?
Canada's federal debt totalled $583 billion at the end of March 1997 (the fiscal year or accounting period is from April 1 to March 31). Interest payments on the debt totalled $45 billion in 1996-97.

The best way to measure our debt burden is in relation to the size of the economy or gross domestic product (GDP) because this indicates our capacity to manage the debt. In 1996-97, the size of the federal debt in relation to GDP – the debt-to-GDP ratio – fell to 73.1 per cent, the first significant decline after 25 years of virtually uninterrupted increases.


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Highlights
The federal government recorded a budgetary surplus of $8.9 billion 2001-02. This marks the fifth consecutive year the federal budget has been in surplus.

Net debt – the accumulation of deficits and surpluses since Confederation – has been reduced by $46.7 billion to $536.5 billion. This reduction in debt, coupled with Canada’s sustained economic growth, has resulted in a significant decline in the federal debt-to-GDP (gross domestic product) ratio, from its peak of 70.9 per cent in 1995-96 to 49.1 per cent in 2001-02.



edited to add info from government website

[Lancer]

Sten! Don't do it! I'm pretty sure there's already a road between SF and LA!

Thanks for the info! and another !

Everyones debt is worse than the US!

Excepting Lithuania

...but they have Rooskies out the wazzoo.

[DuncanK]

Originally posted by Adam Smith
Deficit = one year = flow of funds
Debt = sum of deficits = stock of funds

Clear enough?

Duh

Originally posted by Adam Smith

Unless you pay down the debt you still have to finance it when the original bond matures. The demand does not go back to where it was.

When the budget is ballanced the government is not longer in the market for money. Less buyers, go study supply and demand. Number of buyers is a determinant of demand.

[Sten Sture]

Originally posted by Lancer
...but they have Rooskies out the wazzoo.

Better Rooskies out their wazzoo than under a Rooskie boot!



And another thing - debt gets money from someone who has it - say a rich guys sitting on some cash - to someone who is going to do something with it - say a company building a new factory. That is not all bad.

[DuncanK]

Originally posted by Sten Sture
OMG, somebody needs to spend a little bit of time with a corp fin book and an economics text... but I for one am glad that at least DunK is trying.

We aren't talking about corp fin. You must have learned everything you think you know about economics from a corp fin book if you think we are talking about that. You are very confused. I think it must be your education in corp fin. It corrupted your thinking.

[Sten Sture]

That's it! You have to be a DL!

[Adam Smith]

DuncanK;

I, too, would like to give you credit for trying. But snide comments in your last two posts, directed at people who have both education in the subject and years of work experience, make it difficult to take you seriously.

[Sten Sture]

Adam - I think we have been had!

Well, sometimes it is worth trying, and it probably helped somebody out there.

[DuncanK]

Originally posted by Adam Smith
DuncanK;

I, too, would like to give you credit for trying. But snide comments in your last two posts, directed at people who have both education in the subject and years of work experience, make it difficult to take you seriously.

When you keep putting words in my mouth I'm going to point that out.

Please keep in mind that just because most of the people here seem to be ignorant and incapable of grasping economic concepts doesn't make them all right.

[DanS]

Fight! Fight! Fight!

[Adam Smith]

Originally posted by Sten Sture
Adam - I think we have been had!

Well, sometimes it is worth trying, and it probably helped somebody out there.

Yup.
Its Friday afternoon. Lets go grab a beer.

edit: DanS can come too.

[Sten Sture]

Lunch time out here in the Westness... then again a beer could do me a world of good right now.

Have a good weekend in the district, you two.