Latest / The Infographics Show Podcast / What Happens If the U.S. Pays Its $37 Trillion Debt?

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What Happens If the U.S. Pays Its $37 Trillion Debt? · The Infographics Show Podcast

• 0:00
  Speaker 1: Welcome to beyond infographics. We know there's just so much
• 0:03
  Speaker 1: information flying around, especially on big economic topics like national debt,
• 0:09
  Speaker 1: absolutely overwhelming sometimes exactly so think of this show as well,
• 0:14
  Speaker 1: your personal shortcut. We try to bring clarity, maybe a
• 0:17
  Speaker 1: bit of humor, and really get under the skin of
• 0:20
  Speaker 1: these complex ideas.
• 0:21
  Speaker 2: And today national debt is definitely one of those huge topics.
• 0:25
  Speaker 1: It really is. We're going deep today. We're going to
• 0:27
  Speaker 1: unpack the honestly fascinating ways that national debt isn't just
• 0:31
  Speaker 1: some number you see flashed on a screen.
• 0:33
  Speaker 2: Right, It's not just a spreadsheet entry. It's a real force, a.
• 0:37
  Speaker 1: Powerful force shaping our economy, your finances, even what things
• 0:41
  Speaker 1: might look like for future generations. We want to get
• 0:44
  Speaker 1: past the surface level.
• 0:45
  Speaker 2: Forget the quick infographic explanation. We need the why and the.
• 0:48
  Speaker 1: How, precisely because it's crucial, isn't it, This idea of
• 0:52
  Speaker 1: national debt. It can feel so abstract, Yeah, like it's just.
• 0:55
  Speaker 2: Some government thing happening, you know, miles away from our
• 0:58
  Speaker 2: daily lives.
• 0:59
  Speaker 1: They spread out, don't they. They touch almost everything everything.
• 1:03
  Speaker 2: The interest rate on your mortgage, yeah, the stability of
• 1:06
  Speaker 2: your investments long term, even the cost of well, every
• 1:09
  Speaker 2: day stuff.
• 1:10
  Speaker 1: So our mission today is really to pull back that curtain,
• 1:15
  Speaker 1: reveal the hidden connections, the things people often overlook, and
• 1:18
  Speaker 1: just how significant it is when governments manage their finance
• 1:22
  Speaker 1: as well or sometimes not so well.
• 1:26
  Speaker 2: Let's do it so. National debt. It's a term we
• 1:29
  Speaker 2: hear constantly, but it feels like this huge, maybe scary
• 1:32
  Speaker 2: number for someone listening who wants to go beyond that
• 1:35
  Speaker 2: basic infographic. What exactly are we talking about?
• 1:38
  Speaker 1: Good place to start, because you're right, the nuance matters.
• 1:41
  Speaker 1: At its very core. National debt is the grand total
• 1:45
  Speaker 1: the accumulated amount a government owes its creditors.
• 1:47
  Speaker 2: So not just one bad year of spending, not at all.
• 1:50
  Speaker 1: It's the sum of all the past years where the
• 1:52
  Speaker 1: government spent more than it brought in. Those are the
• 1:54
  Speaker 1: annual budget deficits minus any years where it actually ran
• 1:58
  Speaker 1: a surplus. Okay, And it's really important to distinguished between
• 2:00
  Speaker 1: two main types. First, there's what we call publicly held debt.
• 2:03
  Speaker 2: This is the money that government owes to people like
• 2:06
  Speaker 2: you and me, corporations, state governments, local governments, even foreign
• 2:10
  Speaker 2: countries or investors who bought government bonds.
• 2:13
  Speaker 1: That sounds like the key one. Economically speaking, it generally
• 2:16
  Speaker 1: is yes.
• 2:18
  Speaker 2: It represents the government's actual borrowing from the wider market,
• 2:22
  Speaker 2: its obligations to outside parties. That's the figure that really
• 2:25
  Speaker 2: impacts financial markets. And the other type, the other part,
• 2:29
  Speaker 2: is debt held by government accounts. This is more like
• 2:33
  Speaker 2: an internal IOU. It's money that government trust funds like
• 2:37
  Speaker 2: Social Security or Medicare here in the US have invested
• 2:40
  Speaker 2: in special government securities.
• 2:42
  Speaker 1: Ah So the government owing itself basically.
• 2:45
  Speaker 2: In a manner speaking, yes, one part of the government
• 2:47
  Speaker 2: owes another. It adds to the gross debt figure you
• 2:50
  Speaker 2: might see, but it's not borrowing from the public or
• 2:53
  Speaker 2: foreign entities. So for our deep dog today, we'll mostly
• 2:56
  Speaker 2: focus on that publicly held debt.
• 2:58
  Speaker 1: Got it. That makes sense. So if it's built up
• 3:01
  Speaker 1: from deficits spending more than you take in, it kind
• 3:03
  Speaker 1: of sounds inherently bad, doesn't it, Like me running up
• 3:05
  Speaker 1: my credit card.
• 3:06
  Speaker 2: That's such a common comparison, but it's actually a bit misleading.
• 3:09
  Speaker 2: Government borrowing isn't always a red flag no. In fact,
• 3:13
  Speaker 2: it's often a really fundamental tool, sometimes an indispensable one.
• 3:17
  Speaker 2: Governments use debt strategically, often as an economic shock absorber.
• 3:23
  Speaker 1: A shock absorber, how.
• 3:24
  Speaker 2: So, well, think about a major crisis, a really bad recession,
• 3:29
  Speaker 2: or a global pandemic like COVID nineteen, or even a
• 3:31
  Speaker 2: massive war like World War two. In those times, what happens.
• 3:35
  Speaker 2: Tax revenues collapse because the economy slows down, right, but
• 3:39
  Speaker 2: demands on the government explode unemployment benefits, emergency aid, healthcare spending,
• 3:45
  Speaker 2: military costs.
• 3:46
  Speaker 1: Maybe, so less money coming in, way more going out exactly.
• 3:49
  Speaker 2: Yeah. Now, if the government couldn't borrow at that moment,
• 3:51
  Speaker 2: it would face an impossible choice. Either jackup taxes right
• 3:54
  Speaker 2: when the economy is tanking, which would make things even worse.
• 3:57
  Speaker 1: War slash essential spending. People need it the.
• 4:00
  Speaker 2: Most, precisely, Neither is a good option. So borrowing bridges
• 4:04
  Speaker 2: that gap. It allows the government to maintain vital services,
• 4:08
  Speaker 2: stimulate the economy, maybe without those damaging immediate tax hikes.
• 4:11
  Speaker 1: And it lets them fund things with long term benefits too, right,
• 4:15
  Speaker 1: like big infrastructure project.
• 4:16
  Speaker 2: Absolutely, things like building roads, bridges, investing in research, things
• 4:21
  Speaker 2: that pay off over decades. Borrowing can make sense for
• 4:24
  Speaker 2: those long term investments. It's about stability and fostering future growth.
• 4:29
  Speaker 2: Even if current revenues aren't enough right.
• 4:31
  Speaker 1: Now, So it's a tool for managing crises and investing.
• 4:35
  Speaker 1: Are there other reasons debt builds up?
• 4:37
  Speaker 2: Well, yes, there's something economists sometimes call it deficits bias
• 4:41
  Speaker 2: that can creep into the political system.
• 4:43
  Speaker 1: Deficits bias.
• 4:44
  Speaker 2: Yeah, it often comes from disagreements between different groups in
• 4:47
  Speaker 2: society about spending and taxes. Everyone wants their preferred programs funded.
• 4:51
  Speaker 1: But nobody wants to pay higher taxes to fund them.
• 4:54
  Speaker 2: You got it. So borrowing can sometimes seem like the
• 4:57
  Speaker 2: politically easiest paths go. Governments say yes to spending demands
• 5:01
  Speaker 2: now without making the tough calls about who pays or
• 5:05
  Speaker 2: what gets cut.
• 5:06
  Speaker 1: Immediately, tooking the can down the road essentially.
• 5:08
  Speaker 2: Yeah, kind of it deferred those hard choices, but the
• 5:12
  Speaker 2: jet keeps accumulating. And that's actually why you see some
• 5:15
  Speaker 2: countries or blocks like Germany, Switzerland or the whole EU
• 5:20
  Speaker 2: with its stability and growth packed.
• 5:21
  Speaker 1: Right, they have rules about debt level exactly.
• 5:23
  Speaker 2: They put fiscal rules in place aiming for debt below
• 5:27
  Speaker 2: sixty percent of GDP in the EUS case, specifically to
• 5:31
  Speaker 2: try and counter that political temptation to just keep borrowing.
• 5:34
  Speaker 1: It's really fascinating though, when you step back and think
• 5:36
  Speaker 1: historically the ability for governments to issue debt, it seems
• 5:41
  Speaker 1: so central to how modern states even formed.
• 5:43
  Speaker 2: Oh, absolutely, fundamental history of public debt is incredibly deep.
• 5:47
  Speaker 2: It's tangled up with the rise of democracy, the development
• 5:50
  Speaker 2: of financial markets. It's a huge story.
• 5:52
  Speaker 1: Like the Bank of England. I remember reading something about
• 5:54
  Speaker 1: that being a key moment.
• 5:55
  Speaker 2: A revolutionary moment, truly founded in sixteen ninety four. Kings
• 6:00
  Speaker 2: and rulers often just defaulted. They'd suspend payments whenever they
• 6:04
  Speaker 2: felt like it, which made lending to the state incredibly
• 6:07
  Speaker 2: risky understandable, But with institutions like the Bank of England
• 6:10
  Speaker 2: and a parliament that actually included people who held the
• 6:13
  Speaker 2: government's debt, lenders started to trust the government more. They
• 6:16
  Speaker 2: believed they'd actually get paid back.
• 6:18
  Speaker 1: So trust was the key ingredient.
• 6:20
  Speaker 2: Huge it changed everything. Ended That pattern of constant defaults
• 6:24
  Speaker 2: allowed England to borrow more reliably finance its expansion.
• 6:29
  Speaker 1: It was transformative, and that made government debt itself seem safer.
• 6:33
  Speaker 2: Yes, public debt went from being this really risky proposition
• 6:37
  Speaker 2: to being seen as a relatively safe liquid investment and
• 6:41
  Speaker 2: that created this really important link between public finance and
• 6:44
  Speaker 2: private finance. How so well, if government bonds are seen
• 6:48
  Speaker 2: as safe, they can be used as collateral for private loans.
• 6:51
  Speaker 2: For example, it helped the whole financial system grow. Plus,
• 6:55
  Speaker 2: government borrowing itself, when used for things like infrastructure or defense,
• 6:59
  Speaker 2: actually helped fuel economic growth.
• 7:01
  Speaker 1: It's not just a modern issue.
• 7:02
  Speaker 2: Then.
• 7:02
  Speaker 1: Are there other historical examples of really high debt?
• 7:05
  Speaker 2: Oh plenty. Public borrowing goes way back, apparently even to
• 7:09
  Speaker 2: Greek city states two thousand years ago. But a more
• 7:12
  Speaker 2: recent striking example is Britain after the Napoleonic Wars run
• 7:16
  Speaker 2: eighteen fifteen.
• 7:17
  Speaker 1: How high did their debt get?
• 7:19
  Speaker 2: Over two hundred percent of GDP? Just massive? Wow?
• 7:22
  Speaker 1: How did they handle that?
• 7:24
  Speaker 2: They basically spent the next ninety years consistently running budget surpluses. Slowly,
• 7:29
  Speaker 2: painstakingly they paid it down. It shows that even enormous
• 7:32
  Speaker 2: debt can be managed, but it takes incredible long term
• 7:35
  Speaker 2: fiscal discipline.
• 7:36
  Speaker 1: That definitely puts today's numbers in perspective. It's not new,
• 7:39
  Speaker 1: but the scale now it feels different. What are the
• 7:42
  Speaker 1: current global figures looking like?
• 7:44
  Speaker 2: The scale is staggering today, just looking back at twenty twenty,
• 7:46
  Speaker 2: global government debt hit something like eighty seven point four trillion.
• 7:49
  Speaker 1: Dollars eighty seven trillion.
• 7:51
  Speaker 2: Yep, and that was around ninety nine percent of global GDP,
• 7:54
  Speaker 2: the highest share since the nineteen sixties.
• 7:55
  Speaker 1: Actually, what drove that recent search the financial crisis COVID.
• 7:59
  Speaker 2: Both really huge stimulus measures during the two thousand and
• 8:02
  Speaker 2: eight Great Recession and then absolutely massive spending globally in
• 8:06
  Speaker 2: response to the COVID nineteen pandemic. Necessary actions, many would argue,
• 8:10
  Speaker 2: but they definitely added significantly to national debts worldwide.
• 8:13
  Speaker 1: Okay, so that's the global picture. What about the US specifically?
• 8:17
  Speaker 1: The projections sound pretty concerning.
• 8:19
  Speaker 2: They are quite stark, especially long term. The projection show
• 8:23
  Speaker 2: federal debt held by the public climbing well basically every
• 8:27
  Speaker 2: single year from twenty twenty five out to twenty fifty five.
• 8:30
  Speaker 1: Every year, no dips.
• 8:32
  Speaker 2: Not in the current projections. No, it's expected to hit
• 8:34
  Speaker 2: one hundred and seven percent of GDP by twenty twenty nine.
• 8:37
  Speaker 2: Now that's significant because it would actually surpass the previous
• 8:40
  Speaker 2: historical peak, which was one hundred and six percent right
• 8:42
  Speaker 2: after World War.
• 8:43
  Speaker 1: Two, higher than after World War Two.
• 8:45
  Speaker 2: That's saying something it is, and it doesn't stop there.
• 8:48
  Speaker 2: The projections then show it's soaring, potentially reaching one hundred
• 8:50
  Speaker 2: and fifty six percent of GDP by twenty fifty five.
• 8:53
  Speaker 2: We're talking about a multi decade upward trajectory.
• 8:56
  Speaker 1: And what does that imply about the annual budget? Are
• 8:57
  Speaker 1: we just running big deficits constantly?
• 9:00
  Speaker 2: That's exactly what it signifies, persistently large total deficits. Over
• 9:05
  Speaker 2: the next thirty years. They're projected to average about six
• 9:08
  Speaker 2: point three percent of GDP annually.
• 9:11
  Speaker 1: How does that compare historically, Well, it's more than one
• 9:13
  Speaker 1: and a.
• 9:13
  Speaker 2: Half times the average deficit over the past fifty years,
• 9:16
  Speaker 2: and it's projected to keep rising, reaching maybe seven point
• 9:19
  Speaker 2: three percent of GDP by twenty fifty five.
• 9:21
  Speaker 1: What's driving that? Is it just interest payments?
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  Speaker 2: Interest costs are a big and growing part of it. Definitely,
• 9:27
  Speaker 2: As a debt gets bigger, the interest payments get bigger, obviously,
• 9:31
  Speaker 2: but it's also driven by rising mandatory spending, particularly on
• 9:34
  Speaker 2: programs like Medicare and Social Security.
• 9:36
  Speaker 1: The entitlement programs.
• 9:38
  Speaker 2: Yes, as the population, ages and healthcare costs continue to rise,
• 9:42
  Speaker 2: these programs are projected to take up in ever larger
• 9:44
  Speaker 2: share of the budget. Assuming current logs stay the same,
• 9:47
  Speaker 2: it's a major structural pressure pushing the debt upwards.
• 9:50
  Speaker 1: Okay, let's really unpack this then, because these aren't just
• 9:53
  Speaker 1: numbers on a government report. This has real world consequences, right.
• 9:57
  Speaker 1: It affects job prospects, investments, the services you rely on.
• 10:01
  Speaker 1: It really touches your life directly.
• 10:03
  Speaker 2: Absolutely, it's not abstract economic.
• 10:05
  Speaker 1: So stick with us because we are going deep into
• 10:07
  Speaker 1: exactly how this impacts you. And hey, if you're finding
• 10:11
  Speaker 1: beyond infographics useful for cutting through the noise on topics
• 10:14
  Speaker 1: like this, we'd be incredibly grateful if you took just
• 10:16
  Speaker 1: a second to give us a five star rating on
• 10:18
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• 10:20
  Speaker 2: Yeah, it really helps other people find the.
• 10:21
  Speaker 1: Show it does. Thanks for that. Okay, let's get into
• 10:25
  Speaker 1: those immediate economic ripples, currency values, inflation, How this hits
• 10:30
  Speaker 1: your wallet right now? First off, that link between national
• 10:34
  Speaker 1: debt and the value of our currency. How tight is
• 10:37
  Speaker 1: that connection.
• 10:38
  Speaker 2: It's a very close relationship, almost codependent. You could say,
• 10:42
  Speaker 2: if a country's national debt starts increasing rapidly and crucially
• 10:46
  Speaker 2: looks unsustainable, maybe there's no clear plan to get it
• 10:50
  Speaker 2: under control.
• 10:50
  Speaker 1: Right, If markets lose confidence exactly.
• 10:53
  Speaker 2: If investors start thinking, hmmm, this doesn't look good. Maybe
• 10:56
  Speaker 2: they worry about future inflation, routing the debt's value, or
• 10:59
  Speaker 2: justneral instability that can seriously weaken the nation's currency.
• 11:04
  Speaker 1: Why does that happen? People just sell the currency pretty much.
• 11:07
  Speaker 2: It signals a lack of fiscal discipline. Investors lose confidence
• 11:12
  Speaker 2: in holding that currency or assets denominated in it. They
• 11:15
  Speaker 2: might start moving their money out. That's capital flight, which
• 11:18
  Speaker 2: further pushes the currency value down.
• 11:21
  Speaker 1: Okay, so high debt can lead to a weaker currency.
• 11:24
  Speaker 1: What does that mean practically? For trade, imports and exports?
• 11:27
  Speaker 2: It has a direct impact often quite quickly, think about it.
• 11:32
  Speaker 2: If your currency gets stronger relative to.
• 11:34
  Speaker 1: Others, imports become cheaper for US.
• 11:36
  Speaker 2: Right, you can buy more foreign goods with your dollars
• 11:38
  Speaker 2: or pounds or euros. But the flip side is your
• 11:41
  Speaker 2: exports become more expensive for.
• 11:43
  Speaker 1: Foreigners, making them less competitive.
• 11:45
  Speaker 2: Correct. Now, if your currency weakens, maybe because of high
• 11:48
  Speaker 2: debt concerns, the dynamic flips, imports suddenly become much more
• 11:52
  Speaker 2: expensive for your citizens. Ouch. Yeah, but your exports become
• 11:55
  Speaker 2: cheaper for foreign buyers, which could potentially boost export sales.
• 12:00
  Speaker 1: So a weak currency isn't all bad for trade.
• 12:02
  Speaker 2: It can sometimes help the trade balance by making exports
• 12:05
  Speaker 2: more attractive, but it usually comes at the cost of
• 12:08
  Speaker 2: those higher import prices, which, as we'll see, feeds right
• 12:11
  Speaker 2: into domestic inflation. It's a very tricky balance.
• 12:15
  Speaker 1: And that connection to inflation and interest rates, that's where
• 12:18
  Speaker 1: it really bites, isn't it. How does a weak currency
• 12:21
  Speaker 1: translate to higher prices and loan costs for us?
• 12:24
  Speaker 2: That's exactly where it hits home. A weak currency almost
• 12:28
  Speaker 2: always fuels inflation, especially if your country imports a lot
• 12:32
  Speaker 2: of stuff raw materials, energy, consumer goods.
• 12:35
  Speaker 1: Because those imported goods just cost more in our currency.
• 12:39
  Speaker 2: Precisely, you have to pay more of your weaker currency
• 12:42
  Speaker 2: to buy them. That's imported inflation. And when inflation starts
• 12:45
  Speaker 2: rising like that, what does the central bank usually do?
• 12:48
  Speaker 1: They raise interest rates.
• 12:48
  Speaker 2: They raise interest rates. They do that to try and
• 12:50
  Speaker 2: cool down the economy, curve borrowing and spending and hopefully
• 12:53
  Speaker 2: put a lid on inflation. It's also done to support
• 12:56
  Speaker 2: the currency itself, to stop it from falling further.
• 12:59
  Speaker 1: And if the cur and see strong, a strong.
• 13:01
  Speaker 2: Currency generally helps keep inflation down because imports are cheaper.
• 13:05
  Speaker 2: But the key takeaway here is that high national debt
• 13:08
  Speaker 2: tends to push upward on both inflation and interest rates.
• 13:11
  Speaker 1: And those interest rates that's my mortgage, my car.
• 13:14
  Speaker 2: Loan, your mortgage, car loan, credit card rates, even the
• 13:18
  Speaker 2: interest you earn on savings, though that's often slow to
• 13:21
  Speaker 2: catch up. It means the cost of borrowing goes up
• 13:24
  Speaker 2: across the board, making big purchases more expensive and just
• 13:27
  Speaker 2: squeezing household budgets.
• 13:29
  Speaker 1: That definitely feels tangible. How does this ripple out into
• 13:32
  Speaker 1: the job market then, and our overall ability to get ahead?
• 13:36
  Speaker 2: Well, high national debt eats up the government's financial flexibility.
• 13:40
  Speaker 2: When a huge chunk of the budget has to go
• 13:42
  Speaker 2: just to paying interest on past.
• 13:44
  Speaker 1: Borrowing, there's less money for other things, exactly.
• 13:47
  Speaker 2: Less money for things that can directly create jobs, like
• 13:51
  Speaker 2: building infrastructure, roads, bridges, green energy projects, or funding for
• 13:55
  Speaker 2: small businesses or investing in scientific research. Those kinds of
• 13:59
  Speaker 2: public investments often get squeezed.
• 14:01
  Speaker 1: So fewer government funded job.
• 14:03
  Speaker 2: Opportunities potentially, Yes, And when you combine a potentially tighter
• 14:08
  Speaker 2: job market with those higher interest rates we just talked about,
• 14:11
  Speaker 2: it dampens overall spending power for both consumers and businesses.
• 14:15
  Speaker 1: People are more cautious, businesses maybe hold off on expanding, right.
• 14:18
  Speaker 2: It makes it harder for people to find good jobs,
• 14:21
  Speaker 2: harder for businesses to grow, and that sluggishness can actually
• 14:25
  Speaker 2: further weaken the currency. If the economic outlook dims, it
• 14:29
  Speaker 2: can become a bit of a negative cycle.
• 14:31
  Speaker 1: Can you give us a concrete example, maybe how this
• 14:34
  Speaker 1: plays out in a specific market like housing.
• 14:37
  Speaker 2: Yeah, real estate is a really interesting example. Imagine a
• 14:40
  Speaker 2: country where the currency is weakening, maybe due to high debt.
• 14:44
  Speaker 2: Foreign buyers who have stronger currencies suddenly find that country's
• 14:48
  Speaker 2: property market looks like a bargain.
• 14:50
  Speaker 1: Because their money goes further they get an automatic discount.
• 14:52
  Speaker 2: Exactly, so they might start buying up property, especially in
• 14:55
  Speaker 2: major cities, which pushes prices up. Domestic buyers then find
• 14:59
  Speaker 2: themselves compared heating against people with this built in purchasing
• 15:02
  Speaker 2: power advantage. It can make home ownership much less affordable
• 15:06
  Speaker 2: for locals.
• 15:07
  Speaker 1: Wow, I hadn't thought of that direct link.
• 15:09
  Speaker 2: And even if you're not directly competing with foreign buyers,
• 15:13
  Speaker 2: the broader effects bite a weak currency might make imported
• 15:16
  Speaker 2: building materials more expensive, construction slows down rentals supply my
• 15:21
  Speaker 2: titan because investment seems riskier. It all connects, so it.
• 15:25
  Speaker 1: Really underscores the need for a stable economy, managed debt.
• 15:28
  Speaker 2: Absolutely, a strong economy boosts jobs, grows national wealth, helps
• 15:32
  Speaker 2: keep interest rates manageable, and makes things more equitable internally
• 15:36
  Speaker 2: while also creating better trade opportunities globally. It's all interconnected.
• 15:40
  Speaker 1: Okay, the immediate impacts are clear and quite concerning. Let's
• 15:44
  Speaker 1: broaden the view now to the long term Part three,
• 15:48
  Speaker 1: investments overall growth and this really big idea of generational responsibility.
• 15:54
  Speaker 1: How do those currency swings we discussed affect my investment
• 15:57
  Speaker 1: portfolio over say ten or twenty years.
• 15:59
  Speaker 2: They can have a really significant impact over the long haul.
• 16:02
  Speaker 2: It depends on where you're invested. Of course. If your
• 16:04
  Speaker 2: home currency is weakening over time, like depreciating, right, depreciating,
• 16:08
  Speaker 2: that can actually be good for domestic companies that export
• 16:11
  Speaker 2: a lot. Their goods become cheaper for foreigners, potentially boosting
• 16:16
  Speaker 2: their sales and profits, which could make their stock more attractive.
• 16:19
  Speaker 1: Okay, so a potential upside there.
• 16:22
  Speaker 2: But that same weak currency makes imported goods more expensive.
• 16:27
  Speaker 2: That includes things like machinery or components that businesses need
• 16:30
  Speaker 2: to invest and expand, So it can actually hurt domestic
• 16:34
  Speaker 2: investment by raising costs.
• 16:35
  Speaker 1: At double edged sword.
• 16:37
  Speaker 2: Definitely. And if you hold investments overseas, say in stocks
• 16:40
  Speaker 2: or bonds denominated in a foreign currency, a weaker home
• 16:43
  Speaker 2: currency means those foreign assets are worth more when you
• 16:45
  Speaker 2: convert them back. That boosts your returns.
• 16:48
  Speaker 1: But if I'm a foreign investor holding assets in the
• 16:50
  Speaker 1: country with the weakening currency.
• 16:51
  Speaker 2: Then your returns get eroded when you convert back to
• 16:54
  Speaker 2: your home currency. So yeah, it adds a whole layer
• 16:56
  Speaker 2: of complexity. Diversification becomes really key for long term investors.
• 17:01
  Speaker 2: Dealing with currency risk makes sense.
• 17:03
  Speaker 1: And what about the bigger picture a nation's overall economic
• 17:07
  Speaker 1: growth trajectory? How does managing debt well or poorly affect
• 17:12
  Speaker 1: that long term?
• 17:13
  Speaker 2: A government that's seen as fiscally responsible, that keeps its
• 17:17
  Speaker 2: debt under control and avoids those unsustainable spirals, that reputation
• 17:22
  Speaker 2: for stability is incredibly valuable.
• 17:25
  Speaker 1: Why does it attract investment?
• 17:27
  Speaker 2: Absolutely, it makes the country's currency look more attractive, more stable.
• 17:32
  Speaker 2: Both domestic and foreign investors feel more confident putting their
• 17:35
  Speaker 2: capital to work their long term. They look for predictable environments.
• 17:39
  Speaker 1: Less risk of inflation or sudden policy shifts.
• 17:42
  Speaker 2: Precisely, prudent debt management signals lower risk, which encourages businesses
• 17:46
  Speaker 2: to invest, innovate, and expand. It really is a two
• 17:50
  Speaker 2: way street. High uncontrolled debt tends to weigh down a
• 17:53
  Speaker 2: currency and scare off investment over time, while responsible management
• 17:57
  Speaker 2: generally supports the currency and attracts.
• 17:59
  Speaker 1: Capital and that under lying economic health. That's what allows
• 18:02
  Speaker 1: for good healthcare, education, all those things.
• 18:04
  Speaker 2: Fundamentally, yes, accessible healthcare, good job opportunities, strong education systems,
• 18:10
  Speaker 2: social safety nets. All of these rely on a healthy,
• 18:14
  Speaker 2: growing economy. And that economic health is deeply intertwined with
• 18:18
  Speaker 2: how a nation manages its financial obligations. Over the long run,
• 18:21
  Speaker 2: responsible fiscal policy is the bedrock.
• 18:25
  Speaker 1: Okay, so let's get specific about the US outlook. Given
• 18:28
  Speaker 1: those projections we talked about, what are the main long
• 18:31
  Speaker 1: term consequences of large and growing federal debt that we
• 18:35
  Speaker 1: really need to be aware of.
• 18:36
  Speaker 2: One of the biggest concerns among economists is a gradual
• 18:39
  Speaker 2: slowing of overall economic growth. It's not always dramatic year
• 18:43
  Speaker 2: to year, but it adds up.
• 18:44
  Speaker 1: How does high debt slow growth.
• 18:46
  Speaker 2: It's largely through this effect called crowding out. When the
• 18:50
  Speaker 2: government borrows heavily year after year, it's competing for funds
• 18:53
  Speaker 2: in the same capital markets that businesses use to borrow
• 18:56
  Speaker 2: for investment.
• 18:57
  Speaker 1: So the government's borrowing pushes up the price of borrowing
• 18:59
  Speaker 1: for everyone else.
• 19:00
  Speaker 2: Essentially, yes, it tends to drive up real interest rates
• 19:04
  Speaker 2: the cost of borrowing after accounting for inflation. That makes
• 19:07
  Speaker 2: it more expensive for private companies to finance new factories,
• 19:11
  Speaker 2: R and D technology upgrades, you name it.
• 19:14
  Speaker 1: Less private investment means.
• 19:15
  Speaker 2: Less private investment means workers end up with fewer or
• 19:18
  Speaker 2: less advanced tools and resources. Over time, that leads to
• 19:22
  Speaker 2: slower productivity growth, which ultimately translates into slower wage growth
• 19:26
  Speaker 2: and a lower overall standard of living than we might
• 19:29
  Speaker 2: have had otherwise. It's an accumulating drag.
• 19:31
  Speaker 1: That's a serious, long term drag. What about all the
• 19:34
  Speaker 1: interest we have to pay, especially to foreigners holding US debt.
• 19:38
  Speaker 2: That's another major consequence. As the total debt grows, the
• 19:41
  Speaker 2: interest payments naturally grow too, and a significant chunk of
• 19:45
  Speaker 2: US debt currently around the third is held by foreign investors,
• 19:48
  Speaker 2: Foreign government central banks, So a lot.
• 19:50
  Speaker 1: Of that interest money flows out of the US exactly.
• 19:53
  Speaker 2: Those payments go broad That directly reduces what we call
• 19:56
  Speaker 2: our national income. It's money leaving the US economy that
• 19:59
  Speaker 2: could otherwise have been spent or invested here. It's a
• 20:02
  Speaker 2: leakage that gets bigger as the debt gets bigger.
• 20:05
  Speaker 1: And does carrying all this debt make the country more
• 20:09
  Speaker 1: vulnerable to shocks?
• 20:10
  Speaker 2: Definitely significantly more vulnerable. A large existing debt makes the
• 20:15
  Speaker 2: nation much more sensitive to unexpected rises in interest rates.
• 20:19
  Speaker 2: How So, think about it. If interest rates go up globally,
• 20:23
  Speaker 2: or if markets suddenly get nervous about the US fiscal
• 20:25
  Speaker 2: situation and demand higher rates, the cost of servicing that
• 20:29
  Speaker 2: massive pile of debt and skyrocket almost overnight.
• 20:32
  Speaker 1: Even a small rate increase on trillions of dollars.
• 20:34
  Speaker 2: Means billions, potentially hundreds of billions in extra interest payments
• 20:38
  Speaker 2: each year. That puts immense pressure on the federal budget,
• 20:41
  Speaker 2: forcing really tough choices cut spending elsewhere, raised taxes or
• 20:45
  Speaker 2: borrow even more, potentially creating a dangerous debt spiral. It
• 20:49
  Speaker 2: reduces resilience.
• 20:50
  Speaker 1: That sounds like it could edge towards well a crisis
• 20:53
  Speaker 1: is a full blown fiscal crisis a real risk for
• 20:56
  Speaker 1: a major economy like the US.
• 20:58
  Speaker 2: The risk certainly increases as debt levels climb. A fiscal
• 21:02
  Speaker 2: crisis is essentially when investors, domestic and foreign, just lose confidence.
• 21:06
  Speaker 2: They suddenly doubt the government's ability or willingness to handle
• 21:09
  Speaker 2: its debt.
• 21:09
  Speaker 1: What happens then panic selling.
• 21:11
  Speaker 2: It can trigger panic. You could see an abrupt, sharp
• 21:15
  Speaker 2: spike in interest rates as investors demand huge premiums to
• 21:18
  Speaker 2: hold the debt. This could cause massive losses for banks,
• 21:22
  Speaker 2: pension funds, insurance companies, anyone holding lots of government bonds.
• 21:26
  Speaker 1: Potentially freezing up the financial system.
• 21:28
  Speaker 2: It could It could lead to a credit crunch, bank failures,
• 21:31
  Speaker 2: a deep economic contraction. Given the US dollars global role,
• 21:35
  Speaker 2: a US fiscal crisis would have devastating ripple effects worldwide.
• 21:40
  Speaker 1: How likely is that though.
• 21:41
  Speaker 2: Most economists think the risk of that kind of acute
• 21:43
  Speaker 2: crisis for the US is relatively low in the near term.
• 21:47
  Speaker 2: But and this is a big but, market confidence can
• 21:51
  Speaker 2: be fragile. It can change very quickly, sometimes unexpectedly. High
• 21:55
  Speaker 2: debt definitely increases that underlying vulnerability. Even if a crisis
• 21:58
  Speaker 2: isn't imminent today.
• 22:00
  Speaker 1: So even if we avoid a big meltdown, are there other,
• 22:03
  Speaker 1: maybe slower negative.
• 22:04
  Speaker 2: Effects, Yes, there are. Even without a crisis, Persistently high
• 22:08
  Speaker 2: and rising debt can gradually erode confidence. You might see
• 22:11
  Speaker 2: a slow decline in the value of US assets as
• 22:14
  Speaker 2: investors demand higher returns or look elsewhere.
• 22:16
  Speaker 1: Higher inflation expectations.
• 22:17
  Speaker 2: Maybe that too. If people start expecting the government might
• 22:20
  Speaker 2: eventually inflate away the debt, those expectations themselves can push
• 22:24
  Speaker 2: prices up and critically for the US, there's the risk
• 22:27
  Speaker 2: to the dollar status as the world's main reserve currency.
• 22:30
  Speaker 1: Losing that status would be a big deal.
• 22:32
  Speaker 2: Huge It would make borrowing more expensive for the US
• 22:35
  Speaker 2: government and US companies. It would reduce America's influence in
• 22:39
  Speaker 2: the global economy. It makes financing everything harder and.
• 22:43
  Speaker 1: Does all this debt tie policymakers' hands make it harder
• 22:47
  Speaker 1: to respond to new problems?
• 22:49
  Speaker 2: Absolutely, it severely constrains their options. Imagine another big recession hits,
• 22:54
  Speaker 2: or a major natural disaster requires massive federal aid, or
• 22:57
  Speaker 2: a new international threat emerges.
• 22:59
  Speaker 1: Where does the money come from exactly?
• 23:01
  Speaker 2: If the government is already deep in debt, its ability
• 23:04
  Speaker 2: to respond effectively is limited. The choices become much harder,
• 23:08
  Speaker 2: borrow even more, potentially spooking markets, raise taxes during a downturn,
• 23:13
  Speaker 2: cut other essential programs. High debt means less flexibility, fewer
• 23:17
  Speaker 2: options when you need the most.
• 23:18
  Speaker 1: Okay, this is where it gets really profound. I think
• 23:21
  Speaker 1: moving beyond the economics into the ethics almost this isn't
• 23:24
  Speaker 1: just about budgets. It's about what we leave behind, this
• 23:27
  Speaker 1: idea of an intergenerational transfer. Can you unpack that? What
• 23:32
  Speaker 1: does this debt mean for my kids or their kids?
• 23:35
  Speaker 2: This is a really crucial and maybe the most ethically
• 23:38
  Speaker 2: charged dimension. When the government borrows today, it generally allows
• 23:43
  Speaker 2: the current generation us to enjoy either lower taxes or
• 23:46
  Speaker 2: more government services, or both than we would if the
• 23:49
  Speaker 2: budget were balanced. We get the benefit now, We get
• 23:52
  Speaker 2: the benefit now, But who eventually has to pay back
• 23:55
  Speaker 2: that principle and interest future generations They inherit that obligation.
• 23:59
  Speaker 1: Through higher tax or fewer services for them, likely.
• 24:02
  Speaker 2: Some combination of both. They bear the burden of the
• 24:04
  Speaker 2: borrowing that funded our current consumption or services. So government
• 24:08
  Speaker 2: debt is fundamentally a transfer of resources from the future
• 24:11
  Speaker 2: to the present.
• 24:12
  Speaker 1: And reducing debt that reverses the transfer exactly.
• 24:17
  Speaker 2: If we reduce debt, we're run surpluses. We're essentially leaving
• 24:21
  Speaker 2: future generations with a stronger physical position, potentially a larger
• 24:25
  Speaker 2: capital stock due to more investment, and thus perhaps a
• 24:29
  Speaker 2: higher standard of living. We're making a choice about the
• 24:32
  Speaker 2: economic legacy we leave behind, and we should remember too.
• 24:35
  Speaker 1: The official debt number doesn't even tell the whole story, right,
• 24:38
  Speaker 1: What about things like social Security and Medicare?
• 24:41
  Speaker 2: That's a hugely important point. The gross debt figures usually
• 24:44
  Speaker 2: don't include the massive unfunded liabilities associated with major entitlement programs.
• 24:50
  Speaker 1: Unfunded liabilities meaning promises we've made but haven't set aside
• 24:54
  Speaker 1: the money for precisely.
• 24:55
  Speaker 2: Based on current projections and laws, programs like Medicare and
• 24:58
  Speaker 2: Social Security are face enormous long term short falls. We're
• 25:02
  Speaker 2: talking trillions of dollars over the next seventy five years,
• 25:05
  Speaker 2: maybe thirty seven trillion dollars for Medicare, thirteen trillion dollars
• 25:09
  Speaker 2: for social Security based on some estimates trillions. These are
• 25:12
  Speaker 2: commitments made to future retirees and seniors that, under current policy,
• 25:17
  Speaker 2: the government won't have enough dedicated revenue to fully cover
• 25:20
  Speaker 2: that adds another enormous layer of future burden on top
• 25:24
  Speaker 2: of the explicit debt we've been discussing. It's like a
• 25:26
  Speaker 2: hidden debt.
• 25:27
  Speaker 1: Wow, that really puts the long term challenge into perspective.
• 25:31
  Speaker 2: Okay, if you're finding this deep dive into the realities
• 25:34
  Speaker 2: of national debt insightful and maybe a little sobering, please
• 25:39
  Speaker 2: do take that moment to give beyond Ifographics a five
• 25:41
  Speaker 2: star review. It truly helps us reach more listeners.
• 25:44
  Speaker 1: We really appreciate the support we do.
• 25:46
  Speaker 2: All right, Part four, Let's tackle some myths and get
• 25:49
  Speaker 2: a clearer picture of the real risks. First, big one,
• 25:52
  Speaker 2: the government budget is just like a household budget. You
• 25:55
  Speaker 2: hear this all the time, true or false.
• 25:57
  Speaker 1: Mostly false. It's a really common analogy, but economist can
• 26:00
  Speaker 1: really find it deeply misleading.
• 26:01
  Speaker 2: Why what are the key differences?
• 26:03
  Speaker 1: Several huge ones. First, and most fundamentally, a sovereign government
• 26:07
  Speaker 1: that issues its own currency like the US, the UK
• 26:10
  Speaker 1: Japan can at least theoretically create more money to pay
• 26:14
  Speaker 1: its debts denominated in that currency. I definitely can't print
• 26:17
  Speaker 1: money to pay my mortgage exactly.
• 26:20
  Speaker 2: Households and businesses don't have that power. Second, Governments usually
• 26:24
  Speaker 2: borrow much more cheaply than individuals or companies. Lenders see
• 26:28
  Speaker 2: them as less risky.
• 26:30
  Speaker 1: Partly because they can raise taxes.
• 26:32
  Speaker 2: Right, governments can increase their income through taxation within limits.
• 26:35
  Speaker 2: Of course, households have much less control over their income.
• 26:39
  Speaker 2: And third, governments have an effectively infinite lifespan, an indefinite
• 26:43
  Speaker 2: planning horizon.
• 26:45
  Speaker 1: We don't, so the whole framework is different. The main
• 26:48
  Speaker 1: risk isn't going broke like a household.
• 26:50
  Speaker 2: Mind, for a government issuing its own currency, the primary
• 26:54
  Speaker 2: risk of borrowing too much isn't usually outright default in
• 26:56
  Speaker 2: the way we think of it for a person. It's
• 26:58
  Speaker 2: more often inflame, the value of the currency declining, caused
• 27:03
  Speaker 2: by excessive money creation or loss of confidence. That's the
• 27:06
  Speaker 2: key macroeconomic distinction.
• 27:08
  Speaker 1: Okay, so default risk If it's not the main risk
• 27:10
  Speaker 1: for the US, how real is it for governments? Generally?
• 27:13
  Speaker 1: History is full of defaults, isn't it.
• 27:15
  Speaker 2: It absolutely is. Spain defaulted multiple times back in the
• 27:19
  Speaker 2: sixteenth and seventeenth centuries, the Confederacy defaulted, Revolutionary Russia repudiated
• 27:24
  Speaker 2: Czaris debts.
• 27:25
  Speaker 1: It happens, but less likely if you control your own currency.
• 27:28
  Speaker 2: Much less likely in terms of nominal default because again
• 27:31
  Speaker 2: theoretically they can always create the needed currency units to
• 27:34
  Speaker 2: make the payment. The value might plummet, but the payment
• 27:37
  Speaker 2: can technically be.
• 27:38
  Speaker 1: Made, so who is at risk of default?
• 27:40
  Speaker 2: Though? This risk free idea definitely doesn't apply to cities
• 27:44
  Speaker 2: or states within a country, they can't print money, and
• 27:46
  Speaker 2: it doesn't apply to countries in a currency union like
• 27:49
  Speaker 2: the Eurozone members. Greece couldn't just print euros to pay
• 27:52
  Speaker 2: its debts. That was a huge part of their crisis.
• 27:55
  Speaker 2: I see for major economy like the US, with its
• 27:58
  Speaker 2: own currency and the capacity to pay, a default would
• 28:01
  Speaker 2: almost certainly have to be a deliberate political choice like
• 28:04
  Speaker 2: failing to raise the debt sealing, not an economic necessity.
• 28:07
  Speaker 2: The Constitution even seems to forbid questioning the debt's validity.
• 28:12
  Speaker 1: Interesting. Okay, let's focus on inflation risk then, since that
• 28:15
  Speaker 1: seems more relevant. How does government debt management actually cause inflation?
• 28:19
  Speaker 2: It often happens through something called debt monetization or related
• 28:22
  Speaker 2: concepts like quantitative easing or QE if it goes too
• 28:26
  Speaker 2: far or is done improperly.
• 28:27
  Speaker 1: Monetization meaning the central bank basically prints money to buy
• 28:31
  Speaker 1: the government's debt.
• 28:33
  Speaker 2: Essentially yes, If the central bank buys large amounts of
• 28:36
  Speaker 2: government bonds, either directly or indirectly, it injects new money
• 28:41
  Speaker 2: into the banking system. This increases the overall money supply, and.
• 28:45
  Speaker 1: If there's more money chasing the same amount of goods.
• 28:47
  Speaker 2: Prices tend to go up. That's inflation. Now. QE during
• 28:51
  Speaker 2: a crisis might be aimed at stabilizing markets or lowering
• 28:54
  Speaker 2: long term rates, but if it becomes a routine way
• 28:57
  Speaker 2: to finance government spending, the inflation risk becomes very real.
• 29:01
  Speaker 1: Is there a classic historical example of this going badly wrong?
• 29:04
  Speaker 2: The most extreme and famous cautionary tale is Weimar Germany
• 29:08
  Speaker 2: in the early nineteen twenties hyperinflation exactly after World War One.
• 29:13
  Speaker 2: Facing huge reparations and domestic debt, the government resorted to
• 29:16
  Speaker 2: just printing astronomical amounts of money. The currency became utterly
• 29:20
  Speaker 2: worthless almost overnight. People needed wheelbarrows of cash to buy bread.
• 29:24
  Speaker 1: The total economic collapse, total collapse.
• 29:26
  Speaker 2: It destroyed savings, shattered society. It's the textbook example of
• 29:32
  Speaker 2: why uncontrolled money printingy to finance government obligations is so
• 29:35
  Speaker 2: dangerous and why central bank independence is considered so important.
• 29:40
  Speaker 1: A stark reminder. Okay, one more risk exchange rate risk
• 29:43
  Speaker 1: for foreigners. If I'm say Japanese, and I buy a
• 29:47
  Speaker 1: US Treasury bond, what's my specific risk?
• 29:49
  Speaker 2: So for an American buying that bond, it's seen as
• 29:52
  Speaker 2: free from default risk in dollar terms, But for you,
• 29:56
  Speaker 2: the Japanese investor, you face.
• 29:58
  Speaker 1: Exchange rate risk, meaning the dollar might fall against the end.
• 30:01
  Speaker 2: Precisely, if the dollar weakens against the end between when
• 30:04
  Speaker 2: you buy the bond and when you get paid back
• 30:06
  Speaker 2: or sell it, your returning yen will be lower than
• 30:09
  Speaker 2: you expected. You get fewer en back for your dollars.
• 30:11
  Speaker 1: So my actual return depends on the exchange rate.
• 30:14
  Speaker 2: Correct. That's a risk the domestic holder doesn't face. Now,
• 30:17
  Speaker 2: Sometimes the governments try to eliminate this risk for foreign
• 30:20
  Speaker 2: lenders by issuing debt denominated in a foreign currency like
• 30:23
  Speaker 2: the US dollars.
• 30:24
  Speaker 1: Why would they do that to attract.
• 30:26
  Speaker 2: Foreign investment, maybe get lower interest rates. But if they
• 30:28
  Speaker 2: do that, the borrowing government then takes on the exchange
• 30:31
  Speaker 2: rate risk itself. And crucially, they can't inflate away the
• 30:35
  Speaker 2: value of debt that's denominated in someone else's currency.
• 30:38
  Speaker 1: So they shift the risk onto themselves.
• 30:41
  Speaker 2: Yes, and it's quite common. A huge portion of debt
• 30:45
  Speaker 2: issued by developing countries, for instance, has historically been denominated
• 30:48
  Speaker 2: in US dollars. For this very reason, lenders prefer the
• 30:52
  Speaker 2: safety of the dollar.
• 30:53
  Speaker 1: Fascinating. Okay, this sets us up perfectly for our final section,
• 30:57
  Speaker 1: Part five, A real thought experiment. What if? What if
• 31:00
  Speaker 1: the US national debt just disappeared, vanished overnight poof?
• 31:05
  Speaker 2: It's a really intriguing scenario. On the surface, the immediate
• 31:09
  Speaker 2: benefits seem obvious and incredibly appealing, almost utopian.
• 31:13
  Speaker 1: What would those benefits be let's recap.
• 31:14
  Speaker 2: Well, first, you'd likely see a huge jump in the
• 31:17
  Speaker 2: national saving rate. The government stops soaking up all that capital.
• 31:20
  Speaker 2: That should lead to lower real interest rates across the economy.
• 31:23
  Speaker 2: Because there's less competition for loadable funds.
• 31:25
  Speaker 1: Lower rates mean more investment see exactly.
• 31:28
  Speaker 2: Cheaper borrowing encourages businesses to invest more in equipment, technology, buildings,
• 31:33
  Speaker 2: what economists call capital formation over time that makes workers
• 31:38
  Speaker 2: more productive, boosts wages, and leads to a higher standard
• 31:41
  Speaker 2: of living.
• 31:42
  Speaker 1: Okay, Benefit one, more investment, higher growth. What else?
• 31:45
  Speaker 2: Benefit two? No more massive interest payments from the government
• 31:49
  Speaker 2: that frees up a huge amount of federal revenue, which.
• 31:51
  Speaker 1: Could be used for tax cuts, new spending.
• 31:54
  Speaker 2: Either or both big tax cuts, new investments in education
• 31:58
  Speaker 2: or infrastructure, scientific research, Lots of possibilities, all potentially boosting
• 32:03
  Speaker 2: the economy or improving public services. It removes a major
• 32:06
  Speaker 2: budget constraint.
• 32:07
  Speaker 1: Makes sense any others?
• 32:08
  Speaker 2: Yeah. Thirdly, it could significantly reduce the US current account deficit,
• 32:12
  Speaker 2: the gap between what we import and export. Essentially, with
• 32:16
  Speaker 2: less need for foreign money to buy US debt, capital
• 32:18
  Speaker 2: flows might rebalance. US assets might become less attractive to foreigners,
• 32:23
  Speaker 2: foreign assets more attractive.
• 32:24
  Speaker 1: To Americans, helping the external position potentially.
• 32:27
  Speaker 2: Yes. And finally, as we discussed, eliminating the debt would
• 32:31
  Speaker 2: be a massive shift in generational equity. Future generations would
• 32:35
  Speaker 2: be freed from the burden of paying off our past borrowing.
• 32:38
  Speaker 2: They inherit a clean slate fiscally speaking.
• 32:41
  Speaker 1: Okay, that all sounds fantastic. Higher savings, lower rates, more investment,
• 32:45
  Speaker 1: freedop revenue, better trade balance, fairness to future generations. Where's
• 32:50
  Speaker 1: the catch? Because there has to be a catch, right,
• 32:52
  Speaker 1: Nothing's ever that simple.
• 32:54
  Speaker 2: You are absolutely right to be suspicious. This is where
• 32:56
  Speaker 2: the thought experiment gets really revealing. Wiping out the national
• 32:59
  Speaker 2: debt debt would actually create some enormous, potentially destabilizing problems
• 33:04
  Speaker 2: for the financial system. The biggest one is often called
• 33:07
  Speaker 2: the benchmark asset problem.
• 33:09
  Speaker 1: Benchmark asset? What does that mean? In plain English?
• 33:12
  Speaker 2: US? Treachery Bonds the debt we just notionally eliminated are
• 33:15
  Speaker 2: basically the foundation, the bedrock for pricing almost every other
• 33:19
  Speaker 2: financial asset in the world.
• 33:20
  Speaker 1: The ultimate safe investment exactly.
• 33:23
  Speaker 2: They're seen as the closest thing to a risk free asset.
• 33:27
  Speaker 2: Their interest rates, their yields serve as the benchmark against
• 33:31
  Speaker 2: which the risk and return of everything else corporate bonds, mortgages, stocks,
• 33:35
  Speaker 2: complex derivatives is measured.
• 33:38
  Speaker 1: So if they disappeared, if.
• 33:40
  Speaker 2: They vanished, that fundamental reference point is gone. It would
• 33:44
  Speaker 2: become much much harder to accurately price risks for all
• 33:46
  Speaker 2: other assets. Imagine trying to build a house without a
• 33:49
  Speaker 2: level or a measuring tape.
• 33:51
  Speaker 1: You'd get chaos, more uncertainty, more volatility in market.
• 33:54
  Speaker 2: Huge uncertainty, likely higher volatility, probably higher costs for borrowing
• 33:58
  Speaker 2: across the board because risk premium would be harder to judge.
• 34:01
  Speaker 2: Think about the Treasury yield curve the graph of interest
• 34:03
  Speaker 2: rates for different loan lengths. It's a key indicator used
• 34:06
  Speaker 2: to predict recessions, gauge inflation expectations. Losing that would be
• 34:10
  Speaker 2: like flying blind for financial markets.
• 34:12
  Speaker 1: Wow, okay, so losing the benchmark is huge. How would
• 34:15
  Speaker 1: this affect everyday savers or big institutions like banks?
• 34:19
  Speaker 2: The impact would be massive for regular folks. Super safe
• 34:23
  Speaker 2: options like US savings bonds gone. People looking for safety
• 34:29
  Speaker 2: would have to turn to potentially riskier or less liquid alternatives.
• 34:33
  Speaker 1: And the big players banks, pension funds.
• 34:36
  Speaker 2: They rely heavily on treasuries. Banks hold them to meet
• 34:39
  Speaker 2: liquidity requirements. Pension funds and insurance companies hold vast amounts
• 34:44
  Speaker 2: because they need safe, stable assets to back their long
• 34:47
  Speaker 2: term promises to retirees and policy holders. If treasuries disappear,
• 34:51
  Speaker 2: the stability of these crucial institutions could be questioned. They'd
• 34:55
  Speaker 2: have to scramble to find replacements, which might not be
• 34:57
  Speaker 2: as safe or as liquid.
• 34:59
  Speaker 1: I reready mentioned the flight to quality during the Russian
• 35:01
  Speaker 1: default in ninety eight, everyone rushing into treasuries. That really
• 35:04
  Speaker 1: shows their role as a safe haven.
• 35:06
  Speaker 2: Absolutely in any crisis, treasuries are where global capital runs
• 35:10
  Speaker 2: for safety. Their role is critical in stabilizing the system
• 35:13
  Speaker 2: during turbulent times. Take them away, and where does that
• 35:16
  Speaker 2: money go? What becomes the ultimate safe harbor. It's a
• 35:19
  Speaker 2: serious question.
• 35:20
  Speaker 1: And they're used in derivatives too.
• 35:21
  Speaker 2: You said yes, they're often the underlying asset for complex
• 35:25
  Speaker 2: financial instruments that companies use to hedge risks like changes
• 35:29
  Speaker 2: and interest rates. Pricing those derivatives accurately becomes much harder
• 35:34
  Speaker 2: without a reliable, liquid benchmark treasury market. It could make
• 35:38
  Speaker 2: risk management more expensive and less effective for businesses.
• 35:41
  Speaker 1: Okay, another huge area the Federal Reserve. How could the
• 35:45
  Speaker 1: FED manage monetary policy without treasuries? Isn't buying and selling
• 35:49
  Speaker 1: them its main tool?
• 35:51
  Speaker 2: It absolutely is. The Fed's workhorse tool is open market operations,
• 35:57
  Speaker 2: buying and selling US government securities to influence on the
• 36:00
  Speaker 2: money supply and interest rates. This whole process depends on
• 36:03
  Speaker 2: having a huge, deep, liquid market for those securities.
• 36:06
  Speaker 1: So if that market vanished, the FED.
• 36:08
  Speaker 2: Would be in a tough spot. It would have to
• 36:09
  Speaker 2: start intervening in other much smaller asset markets, maybe corporate bonds,
• 36:13
  Speaker 2: maybe mortgage backed securities.
• 36:15
  Speaker 1: But wouldn't that mean the Fed is suddenly picking winners
• 36:17
  Speaker 1: and losers in the private market.
• 36:19
  Speaker 2: That's the major concern. It could distort prices and credit
• 36:23
  Speaker 2: flows in specific sectors, something the FED generally tries very
• 36:27
  Speaker 2: hard to avoid. It wants its influence to be broad
• 36:30
  Speaker 2: and neutral. Operating in smaller markets could politicize its actions,
• 36:34
  Speaker 2: making it look like it's favoring certain industries.
• 36:37
  Speaker 1: But some people think the FED could adapt, Even former
• 36:40
  Speaker 1: FED officials.
• 36:41
  Speaker 2: Yes. Some argue it's not an insurmountable problem. They point
• 36:45
  Speaker 2: out that other central banks operate without such a massive
• 36:48
  Speaker 2: government bond market, maybe using different tools or different assets.
• 36:52
  Speaker 2: They might have to accept more volatility on their own
• 36:54
  Speaker 2: balance sheet, but they believe the core emission of managing
• 36:57
  Speaker 2: inflation and employment could still be achieved. It would be
• 37:00
  Speaker 2: a fundamental change, though, a huge change, potentially altering the
• 37:04
  Speaker 2: Fed's role and its relationship with financial markets and even politics.
• 37:08
  Speaker 2: It's a complex debate with no easy answers.
• 37:10
  Speaker 1: And beyond a benchmark and fetishues, there's just the sheer
• 37:14
  Speaker 1: liquidity of the treasury market. Why is that specific quality
• 37:17
  Speaker 1: so important?
• 37:18
  Speaker 2: Liquidity just means how easily and cheaply you can buy
• 37:22
  Speaker 2: or sell something in large quantities without moving the price
• 37:25
  Speaker 2: too much. The treasury market is arguably the most liquid
• 37:28
  Speaker 2: financial market in the world.
• 37:30
  Speaker 1: That's good because it.
• 37:31
  Speaker 2: Means investors know they can always get in er out
• 37:33
  Speaker 2: quickly even in a crisis. That very liquidity adds to
• 37:37
  Speaker 2: the safety profile. It provides immense stability to the whole system.
• 37:42
  Speaker 2: Trying to replicate that deep, seamless trading in any other
• 37:45
  Speaker 2: asset class would be incredibly difficult, maybe impossible.
• 37:49
  Speaker 1: So the problem isn't just zero debt. It could even
• 37:52
  Speaker 1: be the market becoming too thin, not enough bonds trading exactly.
• 37:56
  Speaker 2: Even just significantly paying down the debt making the market
• 37:59
  Speaker 2: much small and less liquid could start to cause some
• 38:02
  Speaker 2: of these problems. Higher transaction costs, more volatility, less effective
• 38:06
  Speaker 2: hedging challenges for the Fed. It's a delicate ecosystem.
• 38:10
  Speaker 1: Given all these downsides to a world without treasuries, have
• 38:13
  Speaker 1: people seriously proposed alternatives other assets that could serve as
• 38:17
  Speaker 1: that benchmark.
• 38:18
  Speaker 2: A few ideas get kicked around, Yeah, but they all
• 38:21
  Speaker 2: have their own issues. One is using derivatives like interest
• 38:23
  Speaker 2: rates swaps. Yeah, they're contracts based on interest rates. They exist,
• 38:28
  Speaker 2: there's somewhat liquid you can structure them to be almost
• 38:30
  Speaker 2: risk free in terms of rate movements, but they have
• 38:34
  Speaker 2: counterparty risks the other side of the deal defaults. They're
• 38:38
  Speaker 2: also not as easily traded as bonds, especially in a crisis.
• 38:42
  Speaker 1: Okay, what else? What about bonds from those government sponsored
• 38:45
  Speaker 1: agencies like Fannie may or Freddie Mac. They have a
• 38:48
  Speaker 1: government guarantee, right.
• 38:49
  Speaker 2: They have an implicit guarantee, which makes them seem pretty safe,
• 38:53
  Speaker 2: and they've definitely tried to position themselves as potential successors.
• 38:57
  Speaker 2: But there are problems. First, they carry pacific risks tied
• 39:01
  Speaker 2: to the housing market, not the whole economy.
• 39:03
  Speaker 1: Not a general benchmark.
• 39:04
  Speaker 2: Then not really. And second there's a big moral hazard issue.
• 39:08
  Speaker 2: If everyone believes the government will bail them out no
• 39:10
  Speaker 2: matter what, they might take excessive risks plus relying on
• 39:14
  Speaker 2: them as the benchmark could politicize housing finance even more.
• 39:18
  Speaker 1: Right, any other ideas, more radical ones, Well, the.
• 39:21
  Speaker 2: Most out there idea is maybe the most logical in
• 39:24
  Speaker 2: a weird way. The government could deliberately issue debt even
• 39:28
  Speaker 2: if it doesn't need the money just to maintain that liquid,
• 39:31
  Speaker 2: risk free benchmark market.
• 39:33
  Speaker 1: So borrow money just to invest it somewhere else.
• 39:36
  Speaker 2: Exactly issue treasuries to keep the market alive. Then invest
• 39:39
  Speaker 2: the proceeds in a diversified portfolio of private assets may
• 39:43
  Speaker 2: be managed independently. This preserves the benchmark and avoids default risk.
• 39:48
  Speaker 1: But wouldn't that mean the government becomes a massive owner
• 39:51
  Speaker 1: of private companies.
• 39:52
  Speaker 2: That's the huge political hurdle. It raises massive questions about
• 39:56
  Speaker 2: government intervention in the private economy, potential conflicts of interest,
• 40:00
  Speaker 2: politically motivated investments. It's a radical departure from the current system.
• 40:04
  Speaker 2: Even if it solves the benchmark problem, technically, it challenges
• 40:08
  Speaker 2: fundamental ideas about the role of government.
• 40:10
  Speaker 1: Wow, so eliminating the debt sounds simple, but the reality
• 40:13
  Speaker 1: is incredibly complex, maybe even dangerous for the financial system
• 40:17
  Speaker 1: as we know it.
• 40:18
  Speaker 2: It really highlights how deeply embedded government debt is in
• 40:21
  Speaker 2: the mechanics of modern finance. For better or worse.
• 40:24
  Speaker 1: What an incredible journey today. We've really gone from the
• 40:27
  Speaker 1: basics of what national debt is, why it happens, through
• 40:30
  Speaker 1: its immediate impacts on currency, jobs, your wallet.
• 40:35
  Speaker 2: To the long term effects on growth, investments, and that
• 40:38
  Speaker 2: crucial question of what we leave for future generation.
• 40:41
  Speaker 1: And then peering into that hypothetical world without debt, only
• 40:44
  Speaker 1: to find a whole new set of perhaps even trickier
• 40:46
  Speaker 1: problems revolving around financial stability and the very structure of markets.
• 40:51
  Speaker 2: I think the main takeaway, hopefully for everyone listening, is
• 40:54
  Speaker 2: that national debt is just so much more than a
• 40:56
  Speaker 2: headline number. It's not dry.
• 40:58
  Speaker 1: Economics, No, it's this dynamic force. It shakes so much
• 41:01
  Speaker 1: of our daily lives, from loan costs to job opportunities,
• 41:05
  Speaker 1: and the stability of the entire global system rests on
• 41:08
  Speaker 1: how it's managed.
• 41:10
  Speaker 2: Understanding it, even the complexities and trade offs, gives you
• 41:13
  Speaker 2: such a vital perspective on the news, on policy debates,
• 41:16
  Speaker 2: on the forces shaping your own financial future.
• 41:19
  Speaker 1: So here's a final thought to leave you with. Given
• 41:22
  Speaker 1: everything we've discussed, the benefits of borrowing, the risks of
• 41:25
  Speaker 1: too much debt, the generational transfers, the surprising importance of
• 41:29
  Speaker 1: the debt market itself, what responsibility do we have as
• 41:33
  Speaker 1: informed citizens? How do we engage with these massive, long
• 41:36
  Speaker 1: term questions about the financial health of our nations, not
• 41:40
  Speaker 1: just for us, but for those who come after.
• 41:42
  Speaker 2: That's a heavy question, but a really important one to consider.
• 41:45
  Speaker 1: It really is, we sincerely hope this deep dive has
• 41:48
  Speaker 1: helped clarify the intricate world of national debt for you.
• 41:52
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• 42:00
  Speaker 2: Your support really does help us keep exploring these big topics.
• 42:03
  Speaker 2: Thanks for joining us.