Understanding the National Debt and Budget Deficit


Good morning Hank, it’s Tuesday. So, one of the biggest issues in global politics these days is government debt and deficits, which is a particularly big deal in the United States because of the Presidential campaign and also because of the looming fiscal cliff. And Hank, as you’ll no doubt remember, I received a bronze medal in economics at the 1994 Alabama State Academic Decathlon, meaning that in 1994, I was the third best seventeen-year-old economist among all C students in the state of Alabama, so not to brag or anything, but I’m pretty qualified to explain this stuff. Okay, so first we have to separate the ideas of debt and deficit. Debt is the total amount of our outstanding liabilities. Deficit , or occasionally surplus, is the difference between what the government spends and what it takes in. Right, so in the United States, our current national debt is around 16 trillion dollars, which sounds like a lot of money, and it is. But let’s break this down. The largest single holder of U.S. government debt is actually the Federal Government itself because trust funds like Social Security buy government bons and so the interest goes from the U.S. government to a different part of the U.S.government, which is not borrowing as we usually imagine it. So if you take away that money, you’re left with about 11 trillion dollars, which is still a fair bit of cash. Who owns that debt? China, you probably guessed, but in fact, no. The plurality of that debt is actually owned by us. Us being American individuals and institutions. China owns about 8% of our debt, Japan 7% and the UK, 1%. But it’s important to note that the US also owns foreign debt, including about 235 billion dollars of sovereign debt in China and Hong Kong. Altogether, for every one dollar of US debt that’s owned by a foreign country, we own about 89 cents of foreign debt. So you can’t really think of government debt the same way you’d think about, like, a family owing money to a credit card company because in that situation, the family owes money to someone else. But in the case of US government debt, we mostly, indirectly or directly, owe money to ourselves. So our national debt is a very large number, but at least at the moment, it is not a very large problem. Like in 2011, we paid about 3% total interest on our debt. In 2012, it will be even less because our debt is incredibly cheap right now. I mean, Hank, in some ways, it is literally cheaper than free. Right now, the yield on a one year treasury bon is 0.17%. Okay, two very important things to note about the debt: First, China can’t, like, call in our debt on a day of its choosing. If I buy a $100, one year treasury bon today, I’m going to get that $100 back, along with my 17 cents in interest in one year. I can’t call after a month and be like, “Give me my money back!” So despite what you hear from a lot of political commentators, that is not really a risk to the US economy. Secondly, you may have heard people say, “The government should be run like a business. It should never spend more than it takes in.” Yeah, no, that is not how businesses are run. Like, say that tomorrow, I invent a Marty McFly hovercraft skateboard. In that situation, I wouldn’t wait twenty years until I’ve sold enough DFTBA posters to build my Marty McFly hoverboard factory. I would just borrow the money and build the factory immediately so I could start selling hoverboards and swim in a sea of hundred dollar bills. Actually, I would not swim in a sea of hundred dollar bills. I would hoverboard over that sea. Businesses spend more than they bring in all the time, as well they should and almost all economists agree that governments are similar. There are times when they need to run deficits. For instance, during a recession, government revenue goes down because wages stagnate and unemployment goes up. But government expenditures have to go up, like on unemployment benefits, for instance. So just to be clear, deficits are not inherently evil and our current debt, while it is very large, does not pose a threat to the American economy because we can pay it back with relative ease. I mean, it’s not going to be free, but it’s going to be like 2% of GDP. We’ve done it before! However, there is a huge future risk to us, because what if our debt stopped being cheap? What if people stopped believing that the US is the safest place to put their money and they start to buy bonds in, I don’t know, like Brazil or China or Germany? Well, that would be very bad because most years, we run a budget deficit and so we would need to keep borrowing money at these higher interest rates, which would necessitate more deficits, and therefore more borrowing at progressively higher interest rates. And then we’d have to cut spending, which would slow growth and raise taxes, which would slow growth more, and then Greece. Except this might actually be much worse for us than it’s been for Greece because the US enjoys all kinds of benefits from having the world’s most trusted currency. Like, Hank, believe it or not, most US paper currency actually circulates outside the US and that’s very helpful for us in terms of exchange rates and keeping our debt cheap and if we lost that, it would be devastating because we would just be a regular country again. Okay, so the federal deficit in 2011 was about 1.3 trillion. It’ll be down a little bit this year to about a trillion. It’ll be down further in 2013, no matter who is president, to about 900 billion. But most people think that number needs to continue to come down, or at some point, we are going to risk the spiraling higher interest rates. So there are two ways of doing this. This first is to print more money, like, oh, we need a hundred billion dollars to close the deficit? Look, I just made a hundred billion dollars using a printing press! That sounds like a fine idea, except that it will lead to inflation. Now a lot of people in comments will be saying that we should just return to the gold standard, which I think is a very bad idea, for the reasons I explain in the dooblydoo. However: In the broadest sense, our currency is already pegged to goods and services because if the amount of money in the world doubled tomorrow, the amount of stuff wouldn’t, so you can imagine what would happen to the cost of everything: It would double. The second, and better, way to cut the deficit is to close the gap between what we take in and what we spend, and in times of economic expansion, this is actually quite easy because the tax base grows and the amount of money people make goes up, so they pay more taxes, so we can just have surpluses, as we did in the 1990s. But during slow recoveries, like the one we have right now, it is much more complicated. So, like, both President Obama and Governor Romney favored unspecified spending cuts, Governor Romney also favors a tax cut of 20% across the board, whereas President Obama thinks that we should increase taxes by rolling back the Bush era tax cut on income over $250,000. Neither of these plans is likely to eliminate the deficit, although, again, the deficit doesn’t necessarily need to be eliminated. And no matter what political rhetoric you hear, neither of these plans is terribly radical either. President Obama wants to put the top marginal income tax rate at 39%. It was over 50% every year from 1945 until 1986. Mitt Romney wants to cut that tax rate to 28.5%, which is where it was in 1989. We can argue thoughtfully about what our policy position should be, but amid all the rhetoric and decontextualized statistics, I just want to underscore that while deficit reduction is important, it is not a crisis. The whole idea here is to keep it from becoming a crisis and one of the best ways to do that is to understand the problem without yelling about it, discuss things honestly without assuming that the people who disagree with you hate America. Hank, I’ll see you on Friday. PS, friendly reminder, educational videos are allowed to be over four minutes. I’m still working on my punishment, sorry.

Maurice Vega

100 Responses

  1. The deficit will be lower in 2013 regardless of who is elected. The deficit will shoot back up in 2018 after Drumpf.

  2. us cant just print money because the us has trade deficits. It needs foreign banks like China's central bank to finance american trade deficits.

  3. He's got it mostly right.
    > You can't play Monopoly until the Monopoly Banker prints money in the backroom and hands it out to the players. No money. No game.
    > China buys Federal debt instruments with money WalMart used to buy their goods. Money returned to US.
    > Money creation (Treas/Fed, Comm. Banks) only a problem when production capacity is absent. Then inflation occurs.
    > Medicare/Medicaid (Fiscal spending), at worst, might cause price inflation in meds, hip replacements, nurses, oxygen machines, canes and wheel chairs, rehab and hospice care, and such.
    > Focus first on where the money is spent, second on the amount. Collective benefits: Defence, infrastructure, research, education, healthcare, energy, environment. Pretty much where we focus federal money today.

  4. Invasion of Iraq and Libya is fake news. If it was necessary to pay off the debt through wars. And these wars were actually happening. Then the american debt would have been resolved.

  5. HOW ABOUT 70 TRILLION PRIVATE DEBT? HOW ABOUT RUSSIA OR CHINA OR RUSSIA AND CHINA CREATING A PARALELAL WAY OF INTERNATIONAL PAYMENT SYSTEM BASED ON GOLD AND BLOCKCHAIN?

  6. Do not bother with the comments here; It is driven by either BOTs or just ignorance by people who can not even follow the subject matter of the VID in most cases

  7. Current president don t. with his tax cuts to the wealthy has created a deficit of nearly $800 BILLION added to the Nat'l debt. We cannot spend ourselves to success.

  8. Can you guys do another talking about where we are today? Just an update? And please bring back more Hank and John explain videos!!!

  9. I really don't understand this national debt thing, isn't it like saying I have to pay of the loans and credit card debts of my parents, grand parents and great grand parents etc? For example the UK only recently just finished paying of loans from WW1?

  10. Jesus taught us a principle that would have prevented debt. Ask and receive. We were freely given all things. We need to freely give. Economy is not freely give. Jesus did not war. There would be no veterans had people emulated Jesus.

  11. if you follow MODERN MONEY THEORY (MMT) you would know that the "debt" is not a debt in the real sense, its a accounting balance. The government holds the monopoly on money so it creates money OUT OF THIN AIR, and removes it from the economy by TAXATION. To whom should the government have a debt?? it is its own creator of money it can never run out of money to print.. dont get me wrong, that doesnt mean that it should create more money, because the goal of monetary policy is price stability.

    And it can never default, so long you hold the monopoly on money, this is true to all nations with a monopoly on money. Unlike the euro, the single european countries can go broke because the nations ceded this monopoly to the ECB

  12. When a govt buys bridges roads schools and military spending from its own people and issues IOUs to pay for it. This is known as the internal debt. It shows that a nation is self sufficient since its able to supply itself goods and services from its own citizens or subjects. But when a govt or nation must buy those same things from foreign nations and issues IOUs to pay for it. This is known as the external debt or foreign debt. It shows a nation isnt self sufficient and isnt incapable of sustaining itself.

  13. What america has is a massive foreign debt. This is why modern money theory would not apply to america. Because 21 trillion of that debt is foreign. Just go outside and buy something. Nothing is made in america
    U.S. Becomes World's No. 1 Debtor Nation
    By Stuart Auerbach
    June 25, 1986

    The United States leapfrogged Brazil and Mexico last year to become the world's largest debtor nation, with foreign interests owning $107.4 billion more in the United States than Americans own overseas, the government reported yesterday."Fundamentally, what we are doing is importing goods and exporting bonds, or IOUs, if you will," said Chimerine.

    The problem could worsen if the overseas investors decided to sell their holdings and the United States had to repay capital, as Mexico and Brazil are being asked to do in paying off their loans, instead of meeting only interest and dividend requirements.

    Chimerine added that there won't be a turnaround until the United States curbs its merchandise trade deficts, which have set records for four straight years and reached $158.5 billion in 1985.

  14. just saying I know you have done enough outside research by now, but your school degree actually makes you disable if you think its makes you in position to speak , cause school is teaching non senses mostly ..
    but someone was condition by school no intellectual waste time on lesioning to him

  15. The Rothschild's central banks own the debt. Why would each country buy each others debt. Obviously the real owner of the debt is the Jewish bankers.

  16. World's biggest debtors;
    Our gold NY Tresury 7000 gold tons + Ft. Knox 4500 = our total gold 11500 tons.
    11500t x 32,150oz x $1300 = $481 Billion

    2018 trade deficit = $566B, 2018 national debt $21 Trillion…. this means all our gold leaves over $20 trillion in debt… or our gold does not cover one year of trade deficit! We really are great borrowers!!!

    1989 fall of USSR why??

  17. Oh if only it was still only 16 trillion dollars in debt, god that is weird to type, we are going to hit 22 trillion in a few days, god this debt will destroy us won’t it? I don’t think we’ll ever pay it off

  18. This super smart dude speaks way way WAY too fast. I'm not even sure I understood what his first sentence was. It fell out of his face at warp speed. Lol.

  19. It is 2019 now. We are on 22 trillion debt on 2022 we the gov will spend more on paying interest that on medicaid. By 2024 they will pay 1 trillion just on interest

  20. I think we should focus on the federal budget deficit. We can reduce it by
    1) Tax people with high income
    2) Reduce military spending.

  21. U. S. Debt: $800,000+ per Family? Trillions? Quadrillions?https://www.youtube.com/watch?v=9cV3bTXD__M

    https://www.youtube.com/watch?v=tidTUQcUo5s

  22. The national debt is nothing more principled than bribery from the top down. This means most bribery is not done by the citizens bribing the politicians. On the contrary, the politicians have perfected the technique of bribing us. Then, after they bribe us, they have the gall to pass the bribery bill to us in the form of taxes!

    It should be evident to every one of us that 100% of the national debt is actually bribe payments owed by the politicians but put off onto the taxpayer.

    This means the tens of trillions of national debt is a corrupt political rewards system turned blatantly criminal. It is a rewards system used against the very citizens the politicians claim to represent.

    The politicians have figured out how to give gifts that are not theirs to give. They give us the gifts we want (dams, roads, entitlements . . .) and we foolishly reward the politicians by voting them back into office.

    This top down method is an exceptionally evil form of bribery. Every one of us should hate bribery with a determined passion. But, since we love the initial fruits of bribery, we are getting hosed by having a gargantuan bribery debt aimed straight down our throats — in a never-ending torrent.

    We have even been foolish enough to allow state senators and district representatives to freely have their hands in the national money pool. They do not represent the nation — most do not even represent an entire state — but they control the nation’s money. This means not one of them is accountable for the financial abuse he engages in with national money.

    This is a blindfolded invitation to extreme forms of corruption. Smart criminals have seen the opportunity and they have seized it. Bribery has become so prevalent, they have even changed the word to “politicking”. Another term is, “it’s just business”. They intentionally leave out the word “criminal” between just and business.

    Even if enough of us did have a hatred for bribery, just hating bribery will never cause the bribery masters to stop.

    So, instead of having to go to war to stop these criminals, let's write their empire out of existence. Let's write it out of existence just like the Soviet empire was written out of existence in the 1990's, or just like the Ottoman Caliphate was written out of existence in the 1920's. We can and should do this.

    The federal system continues to commit determined, premeditated treason against every one of its citizens, and it has no intention of ever reforming. It has no need to do so, as long as we go on believing it is wrong to hate evil.

    So, the real gift the politicians have given to us is the loss of our ability to “see” the evil right before our eyes. This inability reduces us to incapability of action.

    If you are one who can see at all, and have any sense of financial responsibility, you should realize the USA is already a dead empire walking. It is bankrupt beyond repair because its financial bankruptcy is the rotting fruit of its more systemic political bankruptcy.

    The consolation we have from recent history is that impenitent, bankrupt empires can be laid to rest without massive bloodshed. We don’t have to kill them to stop them.

    This means we should write the federal government out of existence as fast as we can, and not ever be foolish enough to create a replacement. This is because the political class will figure out how to abuse the replacement too, no matter how well it is constructed.

  23. First, you talk too fast to be an honest man. Do you sell used cars?
    I will esplain how to deal with the National Debt, and I hope you don't understand.
    Have some nobody come up from Mexico and apply for credit at a bank. This would work even better with a Cuban, because they rule the world.
    Have this alien borrow 22 Trillion dollars, and give it to the us government.
    US govt pays all its bills (unlikely).
    Mexican files for Bankruptcy, and goes back to Mexico.
    There, I have just saved Amerikkkkka. What shall be my reward? Will I have to go to prison?

  24. Ha Ha this is still funny he forgot to mention u need to be the fastest listener in the whole world to understand him. Oh yeah and we owe over 4 trillion dollars. if those 4 trillion dollars were in ones they would be able to reach the sun and back twice : ) i hate the american language (det).

  25. Except a company gets debt knowing its profits will help pay off its debts in the future. We increase deficits because politicians want low taxes with higher spending. With that corporations who fail balance a budget die off in the markets. The US can't afford to default on its debt, especially considering the fact that its unconstitutional. Don't ignore the issue because its not a crisis yet, FIX IT NOW. We can excuse debt in dark times yes but right now we aren't in those times and we cant afford excuses

  26. The risk of the US not being able to fund itself because of high interest rates is just completely wrong. It's like he completely forgot that interest rates are set by the federal reserve bank. The US government essentially chooses the interest rate that it wants to pay at any moment. Also, with the primary dealer system, primary dealers are legally required to purchase treasury bonds at whatever rate the government chooses.

  27. The U$D would be affected if countries stop buying goods in the American dominated fiat noney when countries like China. Russia, India the major economies in the world start to by and sell goods using their own currencies. The U$D will start to lose its value.

  28. Friendly reminder that those stats at 5:54 are extremely misleading because there were a lot of loopholes that made sure people didn’t actually have to pay that much.

  29. Senator Rand Paul’s
    “Penny Plan”
    Could balance the Budget quickly!
    Contact your legislators

    Watch and share…
    https://youtu.be/XNUOubtFsEs

  30. Now watching this video in 2019 and US National debt has ballooned from 16 Trillion to 22 Trillion in just seven years time. That is an increase of 72%, and the Nations unemployment rate is at an all time low of 3.6%. How is it at all sustainable that we have run away inflation and government spending only continues to grow every year? Someone please do explain (sincere question), because the whole thing seems like a Ponzi scheme to me.

    Also we are in a period where other nations are reducing their US debt holdings, which would increase the chances that we experience inflation (or devaluation in the US dollar) as additional dollars are dumped back into the system.

  31. To bad people believe paper money actually has value to it. It is worthless, not backed by anything but the faith of the sheeple. SMH, learn to be debt free get educated. He is just another puppet of the fed an IRS.

  32. This is awesome, you are amazing at explaining this. Literally just made me feel 100x better about our situation!! Damn MEDIA blows things up to drive the bs sensationalism that we now live in…

  33. The roughly $2.25 trillion guns & butter spending [1,2] is financed by 10-37% graduated income tax. The roughly $1.7 trillion OASDI/Medicare insurance[3,4] is financed by 15.4% FICA contributions & SS Trust Fund with income cap of $132K.

    Consider a decentralized 0.3% flat tax[5] on the $4 quadrillion liquidity flows tax base[6] instead of an income tax on a $10 trillion subset of the liquidity flows tax base[7] and average 6% sales tax plus 10% capital gains tax, excise taxes, subsidies and tariffs. Apportion these tax revenues to local governments and regulate funding of appropriations to state and federal governments so local constituencies, through their locally elected representatives, have more of a say how their tax dollars are spent. This tax reform raises net wages, net profits and allows for lowering the price of goods, services and exports. Enable the lowering of property taxes to encourage growth of business and jobs in the community. This tax reform also addresses tax havens[8] and saves $800 billion/year on tax processing overhead costs. Consider also setting up a sinking fund to pay down some of the principle on the national debt to maintain good standing with present and future primary lenders.

    1. Making Sense of $1.25 Trillion National Security State Budget| POGO

    2. CRS Report: Welfare Spending The Largest Item In The Federal Budget | Sessions

    3. [PDF]Fast Facts and Figures About Social Security| SSA | 2018

    4. Medicare Financial Status: In Brief | CRS |2018

    5. Alternative Proposals Reform, May 11 2005 | Video | C-SPAN (2nd 5-minute speaker)

    6. Intraday Liquidity Flows | FRBNY

    7. Summary of the Latest Federal Income Tax Data, 2017 Update | Tax Foundation

    8. [PDF] Treasure Islands | Nicholas Shaxson

  34. right now the interest on our debt is more costly than the militaries of russia and china combined the big scary ones that everyone tells us to worry about

  35. NO STOP! Please people educate yourself and try to understand how shadow banking works, how the pension funds invests in the US (and worldwide). There are no real debts for the US 🙂

  36. Heres how we can easily pay off our national debt. Have the US Treasury start printing "official" worthless paper money and use it to
    pay off the phony debt we owe the private central banks. Then WE can loan them OUR money & charge them interest back. Win-win…or lose-lose?

  37. Wow. He was good at economics, as a kid.
    Looks like hever learned since.
    If I borrow money to become a successfull business, I can pay it back.
    How come, the defisit keeps growing ?
    Well … It's because some people want money for free.
    You cannot tell me that it's no a problem.
    I really cannot watch this any further.

  38. You might need to update your numbers, https://www.usdebtclock.org/. What was a potential problem in 2012 is growing into a real problem in 2019 and the prospect of shrinking deficit spending grows ever bleaker especially with the popularity of programs like universal healthcare (Bernie and friends), free college for all (Bernie and friends), and universal basic income (Andrew Yang). Is it time to start sounding alarm bells yet?

  39. Right before I saw this piece there was an advertisement by the Hartford Group for gold. That makes me uneasy because it means people are uneasy about the dollar. These regime change wars we are getting into will cost us trillions of dollars. Look at how much the Iraq War cost us. Do you think we solved many problems by invading Iraq? Are the people of Iraq safer? Are we safer? Now we're acting like we want to fight Russia, China, and Iran. How much do you think that will cost? That's why I strongly support Democratic candidate Tulsi Gabbard. She's the only candidate talking sensibly about these wars.

  40. Why do people get scared when our deficit goes up? If we dont have to pay china right away? Is it cause china charges us interest which is taken from out tax dollars? Never understood national debt

  41. have a federal lottery to run the country; but our government's only job (in the 1930's) was to protect the borders against foreign enemies AND NOTHING ELSE.

  42. your an idiot…..the fed takes in 11 trillion $ a year……the budget is less than 4 billion….that is why the fed gives the Rockefellers 32 billion a year an England 15 billion every year an a lot more.

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