Saturday, 18 February 2012

National Debt

As you saw the news in the middle of 2011 about the US Government being in debt, you wonder why this is the case when you thought that they are one of the richest governments in the world.

Well lets break it down.

The US Government has bills to pay like defence, education, welfare, health, infrastructure, etc. The US Government's yearly income is about $2 trillion while the bills are about $4 trillion a year. It is an expensive world out there as the war in Afghanistan now costs $300 million a day according to the Pentagon while the 2012 Iraq and Afghanistan wars together will cost $118 billion which the Pentagon had to get from the Government. The amount of student loans in the US that have not been repayed had reached $800 billion.

How does the US Government fill this $2 trillion gap? It borrows money from other countries. The US is in a $15 trillion debt and out of that debt, over $798.9 billion of it is from China. The US not only has to pay back the loan but also needs back interest.

Interest is the cost of using the lender's money or as compensation for using the money. Why have interest when the lender gets back the money anyways? Interest rates helps the borrower make profit from lending money. It is to help the lender through uncertain times as the economy is like a rollercoaster. For example - a lender lent $10000 now while the economy is in good shape and the currency value is high. But when the lender gets his money back a year later and the economy went down along with the currency, who is the loser? The lender, as the money it gets back is worth less than a year before. IE - The $10000 repayed buys alot less than the $10000 could buy before. So the borrower in this situation becomes the winner as he took advantage of it by borrowing the money at the right time. So in this situation, that is where interest rates come in to make it a win-win situation for both the borrower and lender.

So how does the US Government pay back it's debt? There are two options - cut spending or raise taxes. If the Government cuts spending, then the people that the money is spent on will complain that they don't have enough money to spend, eg - teachers, defence service members, etc. This is also called austerity which is a big topic in the European Union with debt among Greece, Ireland, Portugal, Spain and Cyprus.

If the Government tried to raise taxes, people will complain that they don't have enough money to spend on as prices go up and income goes down further due to increased income tax.

In the middle of 2011, Obama increased the debt ceiling so he could borrow more money. Greece is in a debt of 500 billion and had seeked bailouts while the UK had reached a debt of £1 trillion.

When countries are in debt and are in a growing crisis, they seek help for bailouts like European countries have been doing. They have been wanting the European Union to bail them out by paying the debts for them with the hope that they will repay the European Union in the future. As of mid 2012, Cyprus has asked for help joining Ireland, Portugal, Greece and Spain.

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