Debt sucks! Believe me if there’s anybody that understands that it’s me. I’ve been paying off student loans for over a decade, and I’m still about four years from being free of them. Not to mention the fact that because I’ve been contributing so much of my monthly earnings towards them that it’s really difficult to save any money for other things I need. The result? Credit card debt, and a car loan which is even worse.
Millions of Americans have similar problems. In fact most people are likely significantly worse off than I am. I graduated right before the financial collapse and I was lucky enough to get my foot in the door of a solid company that didn’t lay anybody off during the crash. It’s not surprising then that so many people are very concerned about the national debt this election year. We fear that America is in the same position with China that you are with your bank. But here is the reality that you need to understand….
China isn’t the bank…….we are.
When you go to your bank and open up a checking account or a savings account your bank is voluntarily taking on debt from you. It owes you that money back with interest. Granted it’s a very small amount of interest. If it’s a checking account it’s almost certainly less than 1%. If it’s a savings account it’s almost certainly less than 2% particularly with interest rates set so low. Is your bank worried? Is your bank fretting about the fact that it’s living paycheck to paycheck? Seems crazy to think about that, but when you deposit your paycheck you almost immediately turn around and spend it all in a week’s time. From the perspective of your bank almost every dime that comes in just goes right back out.
But no, your bank isn’t worried. Your bank is happy to take on as much debt from you as you’d like to give it. In your bank’s mind the debt it has is actually an asset that it wants more of. The reason is because while your bank owes you a ridiculously low interest rate on that debt it turns around and invests that money in other things that pay a much higher interest rate. It buys stocks, bonds, and it loans that money back out to people to buy homes, cars, and it gives people credit cards. So long as the interest they are getting returned to them on those things is higher than the interest they owe back to you they win. They actually make money off of their debt.
The same thing believe it or not is actually true about America. America is just about the safest investment on the planet. Even with Republicans threatening to default, America still has the highest credit rating credit rating agencies give out. People are more than happy to lend us money because they have confidence that they will get it back with interest. The key is how much interest?
When many people including some very ignorant politicians talk about the deficit they make statements about how we’re putting things on “the credit card” and forcing future generations to pay it back. That analogy is very very poor to say the least. A credit card will almost assuredly charge you double digit interest rates of usually more than 13%. That’s why they’re so dangerous because they can be very difficult to pay off. With the national debt however the interest that America owes back is usually a little more than 2% which is similar to what your bank owes you on your savings account. Meanwhile the US economy has historically grown at a rate of closer to 4%, almost double what we’re paying back out. Even today with all the financial issues we’ve had over the last decade we are projected to grow at closer to 3%.
When we take on debt we’re essentially letting China and others open up savings accounts with us. We are then turning around and investing that money in our country. So long as our GDP continues to grow at a higher rate than the interest we owe back, we are actually making money on that investment. Our debt can actually be thought of as an asset in the same way that a bank would.
Now this is not to say that deficits don’t matter. Obviously owing a little over 2% while projecting only about 3% growth isn’t giving us a huge margin for error. I’m not suggesting we just run soaring deficits all day long by any means, but it’s important to realize that the national debt is very very different from your own personal debt. People hear words like Billions and Trillions and they think about those massive numbers that America owes and they try and rationalize it by thinking about their car payment or their credit cards. That national debt is more like buying a house, it’s usually a pretty decent investment. So long as the value of your home increases at better than or close to the same interest rate you’re paying on your mortgage you’re actually coming out ahead so long as you can afford your payment.
Now some people will say okay, but what about Greece? What about Puerto Rico? Look what happened to them when they got into too much debt. Comparing them with America is absolutely ridiculous for a number of reasons, but one that is very important. Greece and Puerto Rico don’t control their own money. Greece is on the Euro, and Puerto Rico is on the U.S. Dollar. When they get into too much debt Greece is at the mercy of the rest of Europe to print them more Euro’s to pay it off, and Puerto Rico has to beg America for help(which we should probably give them by the way).
America on the other hand can literally print enough money to pay off our debt. It could be gone tomorrow if we wished to do it. In fact during the recession that’s exactly what we were doing. Now there are potential downsides to doing that, but realistically we aren’t seeing any of them. In theory if you print too much then it’s possible that each one becomes less valuable and you have massive inflation on your hands. That’s not happening though because the reality is we’re America and people want our money. They’ll happily take as many dollars as we’re willing to give them for the foreseeable future.
Now you’re probably thinking, “wait, wait, wait, wait…..you can’t just create money, that sounds like a Ponzi scheme. Isn’t that what Enron and Bernie Madoff tried to do?” Well it sort of is except Enron and Madoff weren’t creating Enron Dollars and Madoff dollars. They were trying to create U.S. Dollars and they’re not allowed to do that because those dollars belong to America. Only America gets to decide how many U.S. Dollars exist. We’re the only ones who can legally print it, and we’re the only ones that can legally destroy it.
American money is literally monopoly money in the sense that it’s just a piece of paper, but it has value because America has a monopoly on it. You can’t do business in America without it. The U.S. Dollar has value because we say it does, and if you don’t like it then you can go fuck yourself.
That sounds horrible to most people, but in reality it’s the truth about not just dollars, but most other things. America isn’t the only one capable of doing this. It’s the main reason why Europe formed the European Union in the first place. They wanted their money to have more clout.
Even private companies can do essentially the same thing. Take baseball cards for example. They’re just special pieces of paper with famous people’s picture on them. Why are they valuable? Because people really want them for some reason. Usually some have more value because they have better players on them, but you can also alter their value by printing more or less of them. Honus Wagner’s baseball card is worth millions. It’s not because he was the greatest player of all time it’s because there’s only like 10 of them in existence, and there’s no way to make more like it. That’s it! That’s really the only reason it’s worth anything at all.
I realize this may sound scary to some people, but it’s really not. This actually works a lot better than you would imagine. This is the main reason why we got off of the gold standard, and it’s one of the single biggest reasons we were able to get out of the great depression. To many people it may seem like just printing off money to pay for someone else’s hard labor is a dick thing to do, but the reality is that people are happy to take it from us because they have confidence they will be able to trade it in for something else. Something that they deam to be of more value later. So long as they’re willing to take it why wouldn’t we give it to them? Should Nike stop selling Air Jordans even though millions of people are willing to pay them way more than they originally paid to make them?
The reality is that America is literally in the business of making money, and baby….business is good.