Who pays the interest on our spiraling national debt? Is this why bank credit card rates are so uxorious?
The current Yahoo discussion about the evils of credit cards, while good, needs to see the bigger picture, and the relation of politics to credit, of the Iraq War to your Visa card. Who pays the interest on our loans of trillions of dollars? Doesn’t income tax largely support present government programs? If so, isn’t the federal government borrowing heavily from the banking system for much of our lavish expenditures? And if the banks start defaulting on the loans, what happens to America and its government? The consumer may cry out for government regulations of credit card abuses, but why should he expect the government to shoot itself in the foot, inflicting further self-damage?
No no no, government fiscal deficits and debt are not directly related to credit cards or bank loans or consumer interest rates. The government does not borrow from banks like consumers and businesses do. Your question is good but also jam-packed with misconceptions.
OK, The Federal Gov’t does have a debt that it pays interest on. Cash interest is one of the budget items Gov’t spends money on each year. Gov’t gets its revenue from taxing people and corporations. When that is not enough (it usually isn’t), then the Gov’t borrows money by selling Treasury Bonds at public auctions. You yourself can buy one one these bonds and thereby be a lender to the Gov’t; anyone can.
It is NOT true that most of the debt is held by the Chinese and Japanese. The Treasury Dept. regularly reports on the distribution in ownership of US Bonds, and the large majority are held by American people and entities. The Japanese and Chinese together hold about 13% of it, last I saw.
So Gov’t is borrowing, but not directly from banks. It borrows from a wide variety of people, corporations, mutual funds — whoever is there to buy bonds at auction.
The government is actually not borrowing “heavily”. Currently the deficit is running at about 1.3% of the U.S. GDP, and the deficit has been declining each year for several years. That is considered quite frugal and easily manageable by modern standards. Key point: what matters is not the absolute dollar amount of the deficit, but its size compared with the overall economy. (Because Gov’t derives all of its revenue from the private economy). The U.S. has a huge economy and huge tax receipts, as well as a huge budget and a deficit that may look huge to you.
Since it is not banks that pay the interest on the national debt or redeem Treasury bonds that come due, then it is nonsensical to talk of *banks* defaulting on those loans. It is the Federal Gov’t who pays those bills, and there is almost zero chance of the Federal Gov’t defaulting. Actually, there is literally no reason for the Gov’t ever to be forced to default — the Gov’t can ONLY “default” if for some political reason Congress refused to authorize funds to make those payments. (And even they aren’t THAT stupid).
Finally, you should understand that Gov’t deficits actually help to relieve consumer debt. Because the alternative to deficit spending for a given budget is raising taxes. And if individuals faced higher taxes, they’d have less after-tax money to meet their needs or pay their existing debts. How does making you pay higher taxes help you pay off your credit card bill? It doesn’t. It hurts.
The big picture is that we as a society have shifted much deficit spending and debt from consumers (who have to pay high interest rates and who can go bankrupt) to the Federal Government (which gets low interest rates and cannot go bankrupt).
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