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Understanding the National Debt and Budget Deficit

2012-10-23 · John · watch on YouTube · Economics · explainer learning

In election season John explains that the $16 trillion US national debt is mostly owed to Americans and is cheap, so it is not a crisis, while warning that deficits must shrink to keep credit cheap; he compares the candidates' modest plans and asks for discussion without yelling.

What is said

00:00:00 — Greeting; debt and deficits as an election-season issue (presidential campaign, fiscal cliff); John's bronze medal in economics

  • ★★ John says government debt and deficits are among the biggest issues in global politics, especially in the US because of the presidential campaign and the looming fiscal cliff. — 00:00:00 · United States, United States presidential election
  • ★ John jokingly cites his bronze medal in economics at the 1994 Alabama State Academic Decathlon as his qualification to explain the debt. (playful) — 00:00:10

00:00:28 — Debt versus deficit; the $16 trillion debt, intragovernmental holdings, who owns the rest; we mostly owe money to ourselves

  • ★★ John defines debt as the total of outstanding liabilities and the deficit (or surplus) as the difference between what the government spends and takes in. — 00:00:28
  • ★★★ John says the current US national debt is around $16 trillion. — 00:00:38 · United States
  • ★★★ John says the largest single holder of US government debt is the federal government itself, via trust funds like Social Security; without that about $11 trillion remains. — 00:00:45
  • ★★★ Contrary to the guess 'China', John says the plurality of that debt is owned by American individuals and institutions; China owns about 8%, Japan 7% and the UK 1%. — 00:01:05 · China, United Kingdom
  • ★★ John says the US also owns foreign debt, including about $235 billion of Chinese and Hong Kong sovereign debt; for every $1 of foreign-owned US debt, the US owns about 89 cents of foreign debt. — 00:01:17 · China
  • ★★★ John argues government debt is unlike a family's credit card debt because the US mostly owes money to itself, so the national debt is very large but at the moment not a very large problem. — 00:01:31

00:01:52 — Cheap debt and low yields; China cannot call in the debt; governments, like businesses, sometimes should borrow; deficits in recessions; debt repayable

  • ★★ John says the US paid about 3% total interest on its debt in 2011, less in 2012, and the one-year treasury bond yield is 0.17%, 'literally cheaper than free'. — 00:01:52
  • ★★★ John says China cannot call in US debt on a day of its choosing, since treasury bonds are repaid only at term, so despite commentators this is not really a risk to the US economy. — 00:02:10 · China
  • ★★★ John rejects the claim that government should be run like a business that never spends more than it takes in: businesses borrow to invest, as he would to build a Marty McFly hoverboard factory. (playful) — 00:02:27 · DFTBA Records
  • ★★★ John says almost all economists agree governments sometimes need to run deficits, e.g. in a recession, when revenue falls as unemployment rises but spending such as unemployment benefits must go up. — 00:02:58
  • ★★★ John says deficits are not inherently evil and the current debt does not threaten the American economy because it can be paid back with relative ease. — 00:03:13
  • ★★ John says paying back the debt would cost about 2% of GDP, and the US has done it before. — 00:03:23

00:03:28 — Future risk: if US debt stopped being cheap, a spiral of interest, cuts and taxes, 'and then Greece'; the trusted-currency advantage

  • ★★★ John sees a huge future risk if US debt stopped being cheap: investors buying bonds elsewhere would force borrowing at rising rates, spending cuts and tax rises slowing growth, 'and then Greece'. — 00:03:28 · China
  • ★★ John says a debt spiral might be much worse for the US than for Greece, because it enjoys the world's most trusted currency: most US paper currency circulates abroad, keeping its debt cheap. (hedged) — 00:04:01

00:04:21 — Deficit figures for 2011-2013; printing money and inflation; the gold standard; closing the gap, easy in expansions

  • ★★★ John says the federal deficit was about $1.3 trillion in 2011, about $1 trillion this year, and will be about $900 billion in 2013 whoever is president. — 00:04:21
  • ★★ John says most people think the deficit needs to keep coming down, or the US risks spiraling higher interest rates. — 00:04:31
  • ★★ John says printing money to close the deficit would lead to inflation, because currency is in effect pegged to goods and services: doubling the money would double prices. (playful) — 00:04:37
  • ★★ John thinks returning to the gold standard, as commenters will propose, is a very bad idea, for reasons he gives in the description. (hedged) — 00:04:45
  • ★★ John says the better way to cut the deficit is to close the gap between revenue and spending, easy in expansions (as with 1990s surpluses) but much harder in slow recoveries like now. — 00:05:06

00:05:21 — Obama's and Romney's plans and historical top tax rates; deficit reduction important but not a crisis; discuss without yelling

  • ★★★ John says Obama and Romney both favour unspecified spending cuts; Romney also favours a 20% across-the-board tax cut, Obama rolling back the Bush-era tax cut on income over $250,000. — 00:05:25 · Barack Obama
  • ★★ John says neither plan is likely to eliminate the deficit, which need not be eliminated, and neither is terribly radical. — 00:05:36 · Barack Obama
  • ★★★ John says Obama wants a 39% top marginal income tax rate, which was over 50% every year from 1945 to 1986; Romney wants 28.5%, its level in 1989. — 00:05:48 · Barack Obama
    • number check: over 50% — doubtful
    • number check: 28.5% — doubtful
    • number check: 28.5% — doubtful
  • ★★★ John says deficit reduction is important but not a crisis; the best way to keep it from becoming one is to understand it without yelling and not assume those who disagree hate America. — 00:06:02 > «while deficit reduction is important, it is not a crisis.»

00:06:25 — Sign-off; P.S. educational videos may exceed four minutes; John still working on his punishment

  • ★★ In a P.S., John reminds that educational videos are allowed to be over four minutes. — 00:06:28 · Four-minute rule
  • ★★ John apologises that he is still working on his punishment. — 00:06:31 · Punishment

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