ELI5: How does the United States run on a deficit, and what does that ACTUALLY mean for the future?

I am absolutely disturbed that the top comment, which is gilded, has absolutely no idea how his own economy works. And that so many people are misinformed, that it makes it to the top of the thread and is given gold.

This guy has no clue what he's talking about, OP. Disregard every single thing he says.

Debt isn't what you think it is on a macroeconomic level. Debt is a commodity, which is sold to both public and private sectors in the form of treasury bonds and notes. They are low yield, safe investments where countries, businesses, and people can put money to ensure it will not depreciate with inflation/bad investment/etc. They come in terms, going up to 30 years.

So the government "sells" debt. We don't "borrow" money. That's not how the system works. Our debt sells because investors have faith and confidence in our market and dollar. The more "debt" we have, the more it evidences confidence in the market.

Debt (treasury bonds) also act as a tool against domestic inflation. Taking X amount of domestic dollars and turning them into T-Bonds helps keep domestic inflation down. And in an era of low interest rates, that is very important to keep a stable economy.

Treasury bonds (debt) also has discernible effects on interest rates at home and abroad, the price of gold and other precious metals, among many other things.

So. The government is allowed to sell treasury bonds beyond what they earn in GDP, and use that money for whatever Congress dictates. I believe the amount is set at 10% beyond GDP, but I'm not certain.

Also a fun note, countries holding debt can "cash in" at any time. There are clauses written into treasury notes that permit this. So China could in theory cash in all their treasury bonds at once, and we'd have to pay out a trillion dollars. Needless to say, we're all in this together. Easy to understand why political hostilities never really move beyond rhetoric between world powers in today's world, huh?

/r/explainlikeimfive Thread Parent