reply to post by 727Sky
Pardon my lack of knowledge in finance, but where does all the borrowed money come from, what is the interest rate on the loans, who guarantees them,
how much debt is there so far, and how and when is it all going to be paid off?
Borrowed money comes from the federal reserve and other banks in the form of bonds. These are used to fund virtually every public works project in
the past 500 years, basically since fractional reserve banking became a thing. Schools, roads, power plants, parks, and anything else. A bond is
essentially a debt note, it says it's worth a certain amount... we'll say $1 million. People are then paid with these debt notes that can be
exchanged for services. Your $5 bill in your pocket is a claim to $5 of debt.
The interest rate on a bond varies, since 2008 interest rates have been at record lows in order to keep liquidity. Large banks had access to loans at
0.001% interest for the better part of 3 years, while ordinary citizens have been able to get home loans at 3%. It's a bit higher now, as they're
trying to taper things back to a normal rate. To do so without jolting the economy is going to take decades however. Different bonds yield different
returns based on investor confidence and need. Detroit Municipal Bonds for example are junk bond status meaning they pay very high interest. However
because of their junk status you're unlikely to be repaid.
Bonds are guaranteed by the person issuing them. In the case of US Treasury Bonds they're backed by the US Printing Press (really more of a computer
these days), while a city will back them with tax revenues. Repayments on the bonds must be made in order to retain creditworthiness. Bonds are
funded by private investors (and sometimes foreign governments) and all investors want to see a slow steady increase of debt, because it means there
will be a future need for more investing. Ceasing to produce debt makes investors panic.
How much debt there is, is a broader question than the one I think you intended to ask. Each and every dollar created is created and loaned at
interest based on the fractional reserve principal. This means that when there are no dollars in the system there is 0 interest. If you create $1000
and loan it out with a 0.1% interest rate however, there is now $1001 in debt, or $1 that can never be paid back. If the entire monetary supply were
seized and given to the banks, it wouldn't cover the principal+interest. So the correct answer to your question is the M3 money supply+all interest.
The M3 supply ceased being tracked in 2006 happens to no longer be officially tracked, the best estimate I can find states that there's 17.5 trillion
in the M3 supply which would give you a total federal reserve debt of about $17.8 trillion. Although more currency than this is actually in
circulation... it's virtually impossible to give a complete total.
Something tells me however that that isn't the question you were asking. I think you were actually asking about US government debt which currently
sits somewhere between 16.5 and 17.5 trillion, the exact amount is unknown because of congress's accounting tricks to prolong debt ceiling debates.
This is debt that is owed by the US Federal Government. State and local governments also carry debt as do individuals.
As for when it will be paid off, that's a tricky question and requires a longer answer. At an individual level it's good to be debt free, then you
don't pay interest, have more money in your pocket, a better credit score, and all the rest. State and local governments aren't much different from
individuals they have to manage debt and keep it under control. In some cases this hasn't happened and we've had a city or state declare bankruptcy.
Everything changes at a national level however because money starts to mean something different. When you control the creation of your own money, a
concept like debt takes on a completely different meaning, the presence of debt is completely voluntary, at any time a country would be free to
inflate their own currency (create more money) and pay off it's debt in full, because it's a sovereign entity a nation can also simply say they don't
recognize a debt and cancel it without paying it off. There are no consequences to this, not even a hit to a credit rating.
Because of this, debt as I said takes on a new meaning, instead of representing money owed, debt represents faith in a currency. Because there are so
many people in the world and commodities are worth so little relatively, there is not enough oil, gems, and precious metals in the world to back
everyone's currency (just the USD alone would require a stockpile of 1/2 of the worlds oil reserves and all precious metals) which means fiat currency
must be used. The problem however is that unrestrained printing of fiat currency makes it worthless because there is no backing. For this reason
(and also as a more workable solution to war than MAD) the system of monetizing debt was developed. What this basically means is that everyone buys
everyone elses debt... using debt as a medium of exchange.
At this point I should mention I need to work off of memory from looking this stuff up in the past... the inane china owning us debt hype makes
googling for actual numbers here quite difficult so I might be slightly off. The USD for example is backed partially by Federal Reserve debt, but it
also partially backed by Chinese debt, and Japanese debt, and UK debt, and France debt, and a whole multitude of other countries. This means that if
one of those countries cancels out our debt in response to say a war declaration it will cause the USD to devalue. This also means however that many
nations have faith in our currency as being strong and stable, because they're buying our debt to back their own currency. This is why for example
it's actually a good thing that Japan and China each own a trillion dollars worth of US debt. It means they're very confident in our currency and are
invested in our economy doing well. Similarly this is why we own about $750 billion in Chinese debt (note: as a debt:GDP ratio we own more Chinese
debt than they own of US debt which contrary to what you read actually makes us the creditor in this relationship... not the debtor), it creates a
system where each nations currency is backed by everyone elses so that while it's still technically fiat (none of these debt promises are backed by
anything physical) there is a virtual backing.
Now what this means is that the debt cannot be paid off. Instead it needs to be expanded. Keep this in mind whenever you hear a politician talking
about paying down the debt. It's the mark of a person who is either lying to you or ignorant of the financial situation they're about to take control
of. No politicians want to actually explain this to people though because it's bad politically to tell someone they're wrong... and most of them in
congress don't understand what I just wrote anyways even though they're most in the position to know. If we were to pay off the debt we would shrink
the money supply resulting in a huge economic contraction while at the same time reducing foreign confidence in our currency.
Hopefully this answered some questions.
Edit - Messed up some millions/billions/trillions.
edit on 4-2-2014 by Aazadan because: (no reason given)