Debt. Shortage. The two most charged terms in all macro-finance, their connotations of inspiring legislation and executive decisions that affect us all. Yet you can find a few candidates from Congress every year who don’t know the difference between these two important concepts. (Unfortunately, they are sometimes even elected.)

A distinction with a difference

A distinction with a difference

Although they begin with a common syllable and have deceptively similar meanings, the words do not even have the same etymology. “Debt” is derived from the Latin for “due”, “deficit” of the word for “missing”, or “failure”; literally the opposite of “doing.” That alone should give you a hint about the difference between them. Debt owes money, deficit net money is withdrawn (if negative). That is the short version, but it has an exhibition on it.

Let us first tackle the debt, because it is nominally larger. The US federal debt is $ 18.3 trillion, the deficit $ 1 trillion, and it will never be the other way around. The first is a lifetime running tally, while the last is an amount calculated over a certain period. If the federal debt increases by $ 100 billion tomorrow, it would give us a total of $ 18. 4 trillion, where it remains until the next increase or decrease (excluding interest). It is not the case that everything is reset to zero when the current period ends. With a shortage, on the other hand, we look at a certain interval. You will hear terms such as “the federal deficit for the third quarter of 2013.” It is not logical to say “the national debt for the third quarter of 2013”. The debt is measured at a certain point in time, deficit over a period of time. To translate into the language of the financial statements, the debt is a deficit, since the balance sheet is the profit and loss account.

Good debt and bad

Good debt and bad

Debt may be the ominous figure, but does not have to be a weak economy. It is important to understand that debt – money owed – is by definition negative and can never be positive. As long as a country has to finance something expensive, whether it is the looAngelica list of the armed forces or the interstate highway system, that country will have to pay some form of debt.

A nation’s debt is money it borrows, silly obligations that must be repaid by a certain date. That date is usually set; depending on whether the money is in the form of treasury paper (less than a year), treasury bills (1-10 years), treasury bonds (beyond), or one of the many other securities issued by the federal government. It may seem paradoxical, but spending generally increases government debt, while revenue reduces it. A large number of economists will argue that the debt should also include billions of dollars in circulation, all fiat, none of something tangible, and the value determined by nothing more than a public consensus.

Even if we do not take currency into account, the payment capacity of the US government thus becomes a cruel or virtuous circle. The ‘full trust and credit’ of the government is so strong that it makes those T-bills and related obligations attractive enough to entice investors, which then stimulates debt issuance. Where it becomes problematic is when the United States Treasury eventually lends money, not just to private investors, but to the Federal Reserve – paying the right bag with what is left – not to mention British-American governments. That debt is indeed growing. The federal public debt is currently at the highest level (relative to GDP) since 1950.

Surplus plus a minus sign

Surplus plus a minus sign

As for the deficit, it is simply the negative version of the surplus. Take the income of a nation (or a state, a company or a household), deduct the expenses, done. Of course we call it a loss in a private company (or a profit in the case of a positive one). Target (TGT TGTTarget Corp57, 89-2, 36% Created with Highstock 4. 2.6) $ 1 spent. 6 billion more than it had cost last year, the worst result for US-based companies. Also in a wide margin. But a retailer has different financial goals than a sovereign nation. For the latter, generating income is relatively easy. Apply power by increasing tax. Theoretically, it should be easy for national receipts to surpass spending, which means that a country “earns” a surplus. However, a tax authority that levies taxes without distinction will soon revolt its citizens. Meanwhile, Target customers can just shop at Kohl’s (KSS KSSKohl’s Corp.40. 69-4. 53% Created with Highstock 4. 2. 6).

Everything is relative

Everything is relative

The United States has the largest budget deficit in the world. Kuwait and Brunei have the largest budget surpluses in the world and if the net migration between those countries and the United States is an indication, the latter is still the most desirable place to live. If you wonder what that might be like, there is more at stake than just spending that exceeds spending. The libertarian argument seems to be that both numbers should be as low as possible, and if that means that the last one becomes slightly larger than the last, so be it.

The economy of the United States is so large – 22% of the world’s total, despite the fact that the US accounts for only 4% of the world’s population – that the deficit, while it is definitely the largest on earth, is absolutely in the world. center of the package in relative terms. Somewhat impressive: the U. is exactly on the median: 108 of the 215 reporting entities.

Let’s take a look at the national debt. Again responsible for the size and robustness of the national economy, the United States becomes less of an outlier than if we look at rough figures. The United States has the 39th largest debt in the world compared to its gross domestic product, namely 71%. Greek Analyst is more than double, and Japan is more than triple.

The bottom line

The bottom line

deficit may well be harmless or benign, at least at the national level. Even compared to a surplus. Debt is inevitable, as an economy cannot really function without borrowers and lenders. The size of each does not necessarily have anything to do with the other, but has a lot to do with the size of the underlying economy. Debt is the accumulation of your English deficits (and the incidental surplus.) The next time you see a television-talking head staring open-mouthed at the National Debt Clock, or hearing that eliminating our national deficit is the priority on which our collective deficit livelihood depends, I know that I am skeptical.

Leave a Reply

Your email address will not be published. Required fields are marked *

Close