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Why the USA is not capable to pay it's public debt on it's own?

The country needs to create new debt in order to pay it's due debt.

Not only that, but the debt is also only increasing and the country is not capable to reduce the debt. Since 2000 or so, the country is only capable to increase it's debt. And the prediction is that the debt will only increase - Link1 - Link2 - Link3

Hungary and the Czech Republic are capable to pay their debt on their own but in the same time USA is not capable to pay it's debt on it's own. Why is that?

What makes a country not capable to pay it's debt on it's own?

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    $\begingroup$ Mostly because paying the debt would require taxing rich people. (I'm not being sarcastic -- this is the honest truth!) $\endgroup$ – Hot Licks Apr 4 at 22:55
  • $\begingroup$ If this is really your underlying question, i.e. "why is the US decreasing, not increasing taxes (even though they have pile of debt)?" I think you'd better head over to politics SE. en.wikipedia.org/wiki/Supply-side_economics and all that. $\endgroup$ – Fizz Apr 5 at 7:08
  • $\begingroup$ I'm not among those who downvoted your question, but I can see now why some didn't like the way you've cloaked it in comparative economics, if that is really what you have done. $\endgroup$ – Fizz Apr 5 at 7:19
  • $\begingroup$ FYI: a similar question about France on P.SE, why it cannot reduce its deficit: politics.stackexchange.com/questions/38521/… $\endgroup$ – Fizz Apr 5 at 21:44
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The US is in a privileged position of producing a currency that people in other countries want to use (as reserve). There's even a French name for that. Anyway, a result of that is cheap credit for the US government:

Many believe that this dollar dominance has allowed the United States to live beyond its means, running sizable current account deficits financed by borrowing from the rest of the world at cheap interest rates. Some other countries have chafed at this “exorbitant privilege” enjoyed by the United States.­ [...]

There are tangible and intangible benefits to a country whose currency serves as a reserve currency. In addition to the prestige conferred by this status, it also means access to cheap financing in the country’s domestic currency and the benefit of seigniorage revenue—the difference between the purchasing power of money and the cost of producing it—which can be extracted from both domestic and foreign holders of the currency.­

In more mundane terms, the Chinese (and others) don't just hold on to their reserve dollars, but lend then back to the US gov't.

So the incentive to not be indebted is less than elsewhere.

In particular, the classical idea is that:

Economists say the US need not ever pay its debts back entirely, so long as the economy keeps growing enough to cover the payments.

But there are even more extreme ideas like the MMT, which says the US can pay even less than that.

Of course, you could ask, why don't the Chinese (and others) do something else with their dollars. The catch is that there's nothing better on the horizon, in a certain (risk averse) sense:

Moreover, there are no alternative currencies or investments that provide a similar degree of safety and liquidity in the quantities demanded by investors.

The reason the United States appears so special in global finance is not just because of the size of its economy, but also because of its institutions—democratic government, public institutions, financial markets, and legal framework—which, for all their flaws, still set the standard for the world. For instance, despite the Federal Reserve’s aggressive and protracted use of unconventional monetary policies, investors worldwide still seem to trust that the Fed will not allow inflation to get out of hand and diminish the value of the dollar.

(That was written in 2014, quantitative easing is even less controversial now.)


As for "can not": it is a matter of time frame and it is relative to other objectives. Here are some silly ways to pay the debt (quickly):

  • print money; it will causes substantial inflation, loss of confidence etc., and not really solve the problem because a lot of costs the government faces will rise with inflation

  • mega-austerity, i.e. cut suddenly spending, a lot. The a-word is nearly unheard of in the US, unless it's news about Europe. Largely unacceptable politically. Also a shrinking economy means less tax revenue. Classical example nowadays:

Under the auspices of ‘bailouts’ from the IMF and the EU, Greece cut more than 20 per cent of GDP in spending. It lost nearly 30 per cent in final consumption.

There's of course debate whether a little austerity will do that; it depends what you'd cut.

But here's an example what Greece cut (and didn't):

The International Monetary Fund (IMF), which joined the rescue of Greece in 2010 alongside the EU and the European Central Bank (ECB), never asked for defence cuts, but insisted on reductions to wages. So while the defence equipment budget remained intact, soldiers suffered a near 40% drop in salaries.

And that's actually a little misleading too, because (except for defense) investment tanked as well, in fact more than the GDP did, to some 40% of the pre-crisis value.

enter image description here

Someone with better macroeconomics knowledge may be able to quickly estimate what paying the whole US debt at one would do. But since serious sources dismiss the idea off-hand, I can't find a published calculation.

There's no quick fix for the debt that won't impact some other long-term goal.

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    $\begingroup$ This explains why the US is less incentivized to pay its debts back, but isn't the question about ability? $\endgroup$ – Giskard Apr 4 at 19:06
  • $\begingroup$ @Giskard: well, I think the question was based on a wrong premise. But if you or someone else wants to prove the US is solvent... (of course I know it never really defaulted). $\endgroup$ – Fizz Apr 4 at 19:20
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    $\begingroup$ @Giskard: mkay with Trump talking of haircuts a while back, maybe that needs a more detailed answer. $\endgroup$ – Fizz Apr 4 at 19:30
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    $\begingroup$ @JoeJobs: I was talking about "silly ways". Increasing taxation will get more revenue over time under the same constraints as cutting expenditures: not tanking the economy. Whether higher taxes are or aren't likely to do do that is a huge debate, and it's quite politically charged, particularly in the US. See en.wikipedia.org/wiki/Supply-side_economics $\endgroup$ – Fizz Apr 5 at 6:55
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    $\begingroup$ @JoeJobs: and regarding "can anyone guarantee that the creditors will always lend money to USA?" No. It requires some assumptions. $\endgroup$ – Fizz Apr 5 at 7:05
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Fizz gave a great answer. I also wanted to add a little to the original question...

The US has no incentive to pay back it's debts!

The US dollar is used as a major global forex reserve. This helps to reduce risk in investing for the country buying US debt. The US then uses leverage to generate positive GDP above and beyond the rate of debt...rinse and repeat.

I don't think Hungary and the Czech Republic are great comparable in terms of paying of debt. China, though an export economy versus US import economy, has $5.2T* of debt, which is more worrisome in a export economy.

*Government debt and not including private debt.

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  • $\begingroup$ Thanks. So it's not really safe for the creditors like China to lend money to a country (USA in this case) that is not capable to pay it's debt on it's own and that is always making more and more debt, just like it's not safe to lend money to a drug addict, right? $\endgroup$ – Joe Jobs Apr 6 at 2:37
  • $\begingroup$ The US generates positive GDP above and beyond the rate of debt - so be it - yet USA is not capable to pay it's debt on it's own. USA always makes more and more debt. A drug addict can create awesome artwork and sell it for good money - therefore make nice profits - similar with the GDP growth you are pointing at - and then spend all the money on drugs. And then ask other people to lend him money to buy more drugs. So the GDP growth doesn't matter. The only thing that matters is the capacity to pay it's debt. $\endgroup$ – Joe Jobs Apr 6 at 2:42
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    $\begingroup$ Do you have any link to support the claim that "China, though an export economy versus US import economy, has $5.2T* of debt"? And how much debt does USA, though an export economy versus China import economy, have? Or is that 5.2T a net debt? If you have a debt of 5\$ for me and I have a debt of 10\$ for you that means that your net debt is -5\$ - i.e. I have a net debt of 5\$ towards you. $\endgroup$ – Joe Jobs Apr 6 at 3:02
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It's not an issue that the United States government cannot pay down its debt, at least historically that has never been an issue. It really has to do with the politics of the day.

Since the birth of the United States we have had a back and forth where one president has four years of splurging and then the guy after him has to pick up the pieces so to speak and pay down the debt of the previous president. It has always been that way, but then something changed in recent times.

So despite the current trend of seeing Ronald Reagan as a great conservative president of our time, he was actually a big spender with programs such as Strategic Defense Initiatve (SDI), known back then as "Star Wars".

George H. W. Bush was also going to be a big spender, with his "read my lips: no new taxes", but his hand was forced to do the right thing and so he ended up losing popularity as being a liar because he did have to raise taxes, it was time to draw down the debt.

The Clinton administration did the best job of all of drawing down the debt-to-GDP ratio, then Baby Bush got us into these wars with Afghanistan, war in Iraq, starting a new huge government bureaucracy called Homeland Security, that stuff raised our debt load again.

Obama did nothing to draw down the debt and neither is Trump, so we have at least the last three presidents, one of whom should have been the one that draws down the debt and all three decided to be big spenders. So its not that we can't, but its more the politics of the day.

I will say this, there can be a point of no return and that point for most economists is by keeping the debt-to-GDP ratio no greater than 60%. The United States is now at 105%.

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