Toadfish Monastery

I don't understand the mechanisms by which countries borrow vast amounts of money, so I am puzzled by what is going on in the US at present. If they need to borrow money because they don't have enough but their debt is already trillions, how does upping the borrowing limit work? Surely this means they get loaned more money (where from?*) which they are unable to pay back? And how does this mean they retain a triple A rating?

* where does this money come from? If all countries are near broke, as seems , how come there is any money to be lent?

Am I dumb? Or is it all rubbish nonesense?

And why can't I do this to ease my own finances ?

The actual majority of the debt is held by private entities (i.e. corporations) that often have the money because it got not collected through taxes. In the US almost always the choice is taken to lower taxes for business (=>lower revenue for the state, higher profits for the compnay) and then to borrow money from the same company (with interest of course).
For the holders of debt the money is in the interest payed to them. Triple A in this context means that the indebted entity will pay said interest reliably and not default. Since the loans tend to be longterm, the lending parties can expect to get all money back even at low interest rates even if the debts themselves are never repaid.
The debt limit would stop the US from borrowing money to pay the interest for the already existing debts.
The system can run indefinitely on the condition that borrowing stays below growth and inflation because then the increase in revenue and the devaluation of the debt in real $$$ can compensate for the nominal increase in interest to be paid.
That of course requires that revenue keeps up with growth (and is not squandered via tax breaks or extra expenditures) and that there actually is moderate inflation (as opposed to none or deflation).

Quote from: Swatopluk on August 02, 2011, 09:11:00 AM
That of course requires that revenue keeps up with growth (and is not squandered via tax breaks or extra expenditures) and that there actually is moderate inflation (as opposed to none or deflation).

This is where we screw ourselves over, though. The corporations that lend this money are the ones that don't want to pay taxes. If they paid their taxes we could get out of debt.

There is certain aspect of the economy that is almost magical/mystical/fictitious/ethereal. Currency used to be backed by something tangible, like gold, but nowadays most if not all countries no longer have a gold standard. In theory currency is indirectly backed by reserves in other currencies and/or metals but the reality is that is more valued by the perception of markets about it's value. IOW, currency's value is as volatile and subjective as public corporation shares, as if it were an enterprise which can dilute it's shares by printing more (money) or be perceived as flawed if the economic indicators are problematic.

Then there is the credit rating, as with most people, countries or companies can be rated according to their credit worthiness, that is, their ability to pay it's debts on time. That rating isn't directly linked to the cash flow of the country, in the same way an individual's credit score doesn't change if (s)he is jobless, as long as his/her debt is paid in time. In fact it may be paid from credit card cash advances, that isn't the problem of the creditors until it becomes clear that it will be impossible to repay the debt at some point.

An analogy could be that if you spend all your salary on the 20th of the month and still have to pay for your expenses, you go to a day lender to get and advance, to pay your credit card that is due on the 23rd, confident that you can repay the extra loan the 1st of the next month when you receive your salary. It is in no way a smart, prudent, ,much less financially sound way to manage your finances but is perfectly possible to do even for a fair amount of time. The obvious downside is that everyday more and more of your income goes to pay interest on that debt. Why would you be willing to keep doing it may be because you had an unforeseen expense (and accident, sickness, impulse buy, etc) that skewed your financial priorities. Then you reach those magic moments in which you are forced to choose between food, medicine, rent, phone, etc and your bills.

What makes that analogy imperfect is that the ability to raise more money (ie, a growing economy paying taxes) in a moment of crisis can be related to the ability to pump more money into the system (like having to eat more/better and/or having more potent medicines to keep you up, and not doing it because you have to use the money to pay the rent, credit card, and the fat guard dogs in the front porch). But what makes it imperfect is that even paying the fat dogs helps to pump that same economy, albeit in the most inefficient way possible.  On the same token, if the ones managing the finances decide that they will spend more without considering what comes in, the situation becomes unsustainable.

Personally I don't get* why the budget is approved in solid money instead of a percentage of the income of the country. If you say, we'll use X% for defense, Y% for health, etc it forces the system to be on budget always. Not holding my breath for it happening any time soon, though.

*I do get why, it would deprive law makers from the bacon they're so fond of.

Even gold only has value because it is a) considered valuable and b) cannot be 'created' easily (like paper). But there are few if any things gold is actually needed for and cannot be substituted by other materials.

In the past wealth was backed by iron*

*You want my wealth? Talk to the tip/edge of this simple but fully functional sword/spear/axe!

Quote from: Swatopluk on August 03, 2011, 09:41:21 AM
In the past wealth was backed by iron*

*You want my wealth? Talk to the tip/edge of this simple but fully functional sword/spear/axe!

I sometimes worry that it will come to that again, here in the States. I even had a nightmare last week where we were in a police state, and I was the back seat of a car where the person in the front seat got picked off by a sniper.