Skip to content

Understanding America's Debt Problem

2011-08-10 · John · watch on YouTube · Economics · news analysis

Lower-confidence wave

2011 videos did not pass the QA gate (17 %); their analysis is shown but less reliable.

John explains debt, GDP and sovereign default, and argues that although S&P downgraded US debt after Congress nearly defaulted, US borrowing got cheaper because the world still trusts the dollar; trust is the only thing backing currency, and political dysfunction slowly erodes it.

What is said

00:00:00 — Greeting; the planet's debt crisis; after Europe's sovereign debt, the purported American debt crisis

  • ★★ John says the planet, not the vlogbrothers, is in something of a debt crisis; having already discussed Europe's sovereign debt, he turns to the purported American debt crisis. — 00:00:00

00:00:12 — Definitions: unsecured vs collateralized debt; GDP; US debt equals GDP, a ratio of about 100%

  • ★★ John defines two kinds of debt: unsecured debt, repaid only on the borrower's word, and collateralized debt like a mortgage, where the lender takes the house on default. — 00:00:13
  • ★ John says collateralized debt is generally safer, which is why mortgages cost less than credit cards, though as recently learned it is not always a good investment. — 00:00:25
  • ★★★ John says US GDP, the country's total annual economic output, was about $14.6 trillion in 2010, and total US debt obligations are currently also $14.6 trillion. — 00:00:35 · United States
  • ★★★ John says the US debt-to-GDP ratio is therefore about 100%, which could be worse but is not good. — 00:00:51 · United States

00:00:58 — Governments over 90% debt-to-GDP tend to default; sovereign debt is unsecured; gold does not help; only trust backs currency

  • ★★★ John says governments with a debt-to-GDP ratio over 90% traditionally tend, though not always, to default on their debt. (hedged) — 00:00:58
  • ★★ John says default hurts lenders and the government, since proven defaulters cannot borrow at low rates, yet hundreds of governments have defaulted in the last few centuries, whatever backed their currency. — 00:01:14
  • ★★★ John argues all sovereign debt is essentially unsecured: a government has no house to give a bondholder, gold and silver are too far from their commodity value to back currency, and many gold-standard countries defaulted; only trust backs currency. — 00:01:33

00:01:53 — Credit-rating agencies; Congress's game of chicken; S&P downgrades the US from AAA to AA+; the expected debt spiral

  • ★★ John explains that independent credit-rating agencies like Standard and Poor's rate debt from AAA down, and a better rating means cheaper debt: Australia pays 4% on ten-year bonds, Greece 15%. — 00:01:53 · Australia
  • ★★ John says the US is well above the 90% alarm threshold and Congress, in "the stupidest game of chicken ever," only barely avoided defaulting. (playful) — 00:02:13 · United States, United States Congress
  • ★★★ John says Standard and Poor's, for the first time in US history, downgraded US debt from AAA to AA+. — 00:02:22 · United States
  • ★★ John explains the expected effect: downgraded debt grows more expensive, forcing tax rises and spending cuts that slow the economy and cut revenue, and ever costlier borrowing until bankruptcy. — 00:02:29

00:02:47 — Yet US debt got cheaper: four reasons (volatility, Bush tax cuts, dollars abroad, producer countries need US consumers)

  • ★★★ John says that in the days since the downgrade US debt has instead gotten cheaper; some treasury bill yields are so low the US is essentially paid to borrow. — 00:02:47
  • ★★ John's first reason: the world economy is so volatile that US debt, though less safe than before, still seems safer than anything else. — 00:03:01 · United States
  • ★★★ John says the so-called debt crisis would almost completely be solved by not extending the Bush tax cuts, which happens if Congress does nothing, and Congress is "awesome at doing nothing." (playful) — 00:03:09 · United States Congress
  • ★★ John's third reason: the whole world is invested in the American economy; by some estimates half of US currency in circulation circulates outside the US. (hedged) — 00:03:20 · United States
  • ★★ John's last reason: for now, countries that make things, like China, need countries that consume, like the US, to keep consuming. — 00:03:27 · China, United States

00:03:40 — The dollar's trust is worth trillions; political dysfunction chips away at the world's faith; sign-off

  • ★★★ John says that even downgraded, US debt is still much cheaper than many AAA-rated countries', and the dollar's role as world default currency plus trust in US repayment is worth trillions of dollars a year. — 00:03:40
  • ★★★ John says this is probably not going away soon, but in the long run every show of political or economic inability chips away at the world's faith in the US. (hedged) — 00:03:48

Threads in this video

Replies to

BR2_4048317b9d