I hope everyone’s had a good week. With New Years right around the corner I’ve been thinking about what my resolutions will be. Typically, I have been good about sticking to them for at least a year, if not longer. This year I think I’ll have three: (1) Delete TikTok, (2) don’t hit snooze a single time on my alarm clock, and (3) take a cold shower every morning instead of a hot one.
There, now they’re out in the open. Keep me accountable.
Also, I’m taking next week off, so you won’t be hearing from me until next year.
Talking outside my expertise
Ever wanted to hear someone dive into a topic that lies completely outside their expertise?
Well, this is the post for you.
The government, specifically lawmakers and Congress, are working to pass a new spending package before the end of the week to prevent a government shutdown. Don’t really care? Yea, me either.
But I feel like I always hear about a potential government shutdown around the holidays. So, me being the problem solver I am, decided to look into why this always happens and why we can’t seem to ~figure it out~.
To get an easy win first, the government’s fiscal year starts and ends in October. So, they are busiest working on the budget and dealing with the consequences this time of year (the holidays seem like a tough time for busy season). That checks out.
But the rest of my research led to two main things: who does the government owe all this money to, and what does the debt ceiling have to do with it?
Let’s talk about who we owe the monies to first.
Who doe we owe?
Right now, the U.S. is roughly 31 trillion dollars in debt.
Yep, that’s a lot. But who are we in debt to?
Well basically all of the nation’s debt is from bonds. So, when you go buy a savings bond through the government, you are essentially giving them a small loan. They’ll spend the money deposited through these bonds for the nation’s current needs, with a promise to pay you back + interest later.
Americans buy these bonds because they are viewed as safer bets. AKA the government will pay you back and you’re not dependent a volatile stock market.
Bottom line is that the public is a large holder of the US debt.
We also owe other governments who buy these bonds, with China and Japan being the main holders. Other countries will buy bonds to prop up their own economy since the dollar is so strong.
For me, I picture it as a continuous feedback loop with the government constantly going to the public for financing. Where it’s nearly impossible for the government to make this number zero, but is more so reasonable to slow the bleeding.
There you have it, now we know who the US owes money to.
What happens when the collector calls?
What about this debt ceiling, it surely hasn’t been 31 trillion forever?
Here are the debt ceiling increases under the different administrations:
There are a few different things that contribute to this but two big ones:
- The government spends more than what it collects in taxes.
- The government must pay back the interest of the bonds they issue (most of the time a locked interest rate)
Essentially, the debt ceiling is what money the government has to pay the bond holders back (+interest of course). To me, that graph appears to be increasing somewhat exponentially which is kind of alarming, but at the same time the dollar is still the strongest currency which is comforting.
What happens if we don’t raise the debt ceiling?
All hell breaks loose. No more social security, no pay for the military or federal employees, no child subsidization/support, and likely a collapse of the global economy.
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Ok, all of this makes sense to me for the most part. Whoever invented bonds as a way for the government to get money was smart, I wouldn’t have thought of that.
I do; however, have a lot of questions.
What would happen if every bond holder in the U.S. suddenly called it? Would the government have enough money to cover it? Would they have to print more? Would they then raise the debt ceiling?
Also, why can’t the budgeting and debt ceiling conversation happen at the same time? Seems like it would provide a more wholistic picture of what the government plans on spending, what it brings in, and what is in its reserves.
Why can’t we just cut spending?
Lastly, should we be concerned moving forward? Nobody I talk to (granted I am younger) is buying bonds. Most young people are holding exclusively equities, even for long term plays, but a lot of the older generation love bonds. What happens when the baby boomers (aka most of the US population) start calling their bonds for retirement spending? Will the debt ceiling just be raised, or will we foot the bill?
Too many questions, not enough answers. At least not enough answers that I know. I don’t envy the people that have to figure all of this out.
Maybe the government should use Mint or YNAB.
At least now you know more about government funding than when you started. And if I’m wrong, sue me (or just reply).
TLDR: Just watch this video.
Let’s have ourselves a weekend, a Christmas, and a New Year.