Why should we care about fixing the National Deficit?

[PopcornTreeCt]

Maybe you guys can shed some light on this. How does it affect us? Why should it be fixed? I'm clueless on this one.

[hahn]

Interesting that no one has replied yet. I was hoping someone would start this discussion. Since no one has, I will.

First off, a disclaimer: I'm not an expert on economics. I will fully admit that my understanding is rudimentary. This is just as far as I understand. If someone KNOWS I am wrong about it, please correct me.

Okay, firstly, there is the deficit and the debt, which are different. The deficit is the difference between what the government spends in a year, and what it takes in from taxes (if they spend less than the taxes, then it's a surplus). The debt, is the accumulation of the deficit over the years. The deficit for this year I believe is estimated at $300 Billion. The debt I believe is very close to $8 Trillion ($8,000 Billion). This is a good page to get a historical perspective on our deficit and debt. (http://www.cedarcomm.com/~stevelm1/usdebt.htm)

In a credit card analogy, the deficit would be the difference between this past month's charges, and what you pay the credit card company on this billing. The debt would be how much you STILL owe the credit card company overall (if you've never paid off in full before).

Why we care is because this is REAL money that the government owes. And it's not just to other countries. It's to people in the U.S.A. - government contractors, employees, the military, etc. If it's running a deficit, the government issues bonds, which it sells to the citizens to make up the money. However, either way, it still OWES money.

Why we care is that one way or another, the government MUST pay that money. If it does not, then the government basically loses credibility. It's 'credit rating' drops. It becomes a ripple that rushes through all aspects of our economy.

[Ranger]

Well, I think my problem with not controlling a deficit is that it gives less of an incentive for us to put a restraint on spending. Ignoring the deficit is like giving a "needy" kid a credit card with no spending limit.

Well, I'm tired so this is a short post. :)

[classicman2]

Are you speaking of the deficit or the national debt?

Deficits really don't mean a great deal - assuming that you're creating a deficit by spending money where it should be spent. The old argument about increased interest rates seems to have fallen flat on its face.

[Mordred]

The thing a lot of people don't understand is that a national debt is a good thing for a country to have.

Our national debt is made up of the following two types:

Intragovernment debt

Government trust funds
Pension Plans & Social Security

public debt (held by the public and foreign entities)

Treasury Notes
T-Bills

Intragovernment debt is currently around 3 trillion with the rest Publically held.

The reason the country wants debt is to pay for projects now which will hopefully increase GDP to such an extent that GDP growth outpaces debt growth. The debt is repayed but at a much later date (30 year notes are extremely common) when the economy has presumably expanded. Growth corporations function in exactly the same way and are expected to use debt financing to facilitate their growth.

Currently the national debt of the US is around 65% of the GDP which is about average. Japan's national debt is somewhere around 125% of their GDP which is probably cause for alarm.

Now you cannot debt finance indefinitely as the money must be repaid (government bonds are considered riskless as the government, it is assumed, will never default on them) at some future point. The balance you want to strike is to have a budget deficit during times of slow growth and a balanced budget during times of economic boon which will allow the debt to come back into more manageable levels. You also need to make sure that your deficit spending is not too above what economists and investors want to see. When it is, one of the side effects is a weakening of the dollar (which has it's positive and negatives as well).

I'm not an expert on this sort of thing though. For more information go here:
http://en.wikipedia.org/wiki/U.S._public_debt
and
http://en.wikipedia.org/wiki/National_debt

[classicman2]

What's interesting is the two parties 'about face' on the deficit and the debt.

[al_bundy]

higher deficits pump more money into the economy and in theory cause a rise in inflation

[Ranger]

But a higher deficit can also be a sign of more wasted spending, no?