It’s been nearly 20 years since the last time the U.S. government managed to not spend more than it earned. No one in their right mind would lend money to a business that has been running in the red for two decades. So how is it that Washington can keep borrowing?
First, it’s important to understand that sovereign debt – the debt of governments – is a vastly different animal from private debt. They are both debt, sure, much like blue whales and orangutans are both mammals. You can’t look at sovereign debt purely in terms of a lender/borrower relationship.
At its simplest, governments amass debt to satisfy constituent demands for spending beyond what they are willing to accept in taxation. Because any consequences exists beyond the next next election cycle, politicians have little incentive to spend responsible. You can catch more votes with the honey of government programs than bitter austerity. But, sovereign debt serves a vital function in the broader economy as well.
Governments have the power to levy taxes and compel people to pay them. So, in most cases, there’s little risk that a country like the U.S. won’t be able to muster the financial means to meet their debt obligations.
This makes sovereign debt a relatively safe way to hold a particular currency while receiving interest. You could stuff money under your mattress, but if you did, inflation would erode its value over time. It would be a far better idea to buy U.S. Treasury notes that at least pay you a little interest.
Because they are easily traded and widely available, US Treasuries are the preferred collateral for business transactions. Regulatory standards often require holding U.S. Treasuries too.
First, it’s important to understand that sovereign debt – the debt of governments – is a vastly different animal from private debt. They are both debt, sure, much like blue whales and orangutans are both mammals. You can’t look at sovereign debt purely in terms of a lender/borrower relationship.
At its simplest, governments amass debt to satisfy constituent demands for spending beyond what they are willing to accept in taxation. Because any consequences exists beyond the next next election cycle, politicians have little incentive to spend responsible. You can catch more votes with the honey of government programs than bitter austerity. But, sovereign debt serves a vital function in the broader economy as well.
Governments have the power to levy taxes and compel people to pay them. So, in most cases, there’s little risk that a country like the U.S. won’t be able to muster the financial means to meet their debt obligations.
This makes sovereign debt a relatively safe way to hold a particular currency while receiving interest. You could stuff money under your mattress, but if you did, inflation would erode its value over time. It would be a far better idea to buy U.S. Treasury notes that at least pay you a little interest.
Because they are easily traded and widely available, US Treasuries are the preferred collateral for business transactions. Regulatory standards often require holding U.S. Treasuries too.
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