What occurs when the government spends more money than it takes in?

Question

and it happen in the 1980's

Answer 1

Business as usual

Answer 2

To make a long story short, it's no different for the U.S. government than it is for you and I with credit cards. If we borrow too much, the cost to borrow will go up and we wont be able to borrow as much. So, we might have to tighten our belts and do without something. Like college for our kids or high paying jobs.

I'm not an expert on this but here's my explanation:

For the last 30 years, it is an almost constant situation. The Federal Government issues debt instruments (Treasury Bonds and Treasury Notes) to borrow the difference between revenues and expenses. They are 30-year loans made to the government by the purchasers. Interest is paid annually. (The government in 30 years pays the principle back).

There are quarterly auctions to sell the securities. The Treasury decides the interest rates and prints the documents. Then the securities are auctioned. The effective interest earned by the buyer is dependent on what they pay at auction. Example:

-The Treasury prints $10,000 bonds with a 5% interest rate.
-At auction, the bonds are sold to the highest bidder. (Let's say to keep the math easy he buys for $5,000. In actuality it would be more likely to by $9,500 - $10,500).
-The buyer is then paid $500 per year (5% of $10,000) on a $5,000 investment. His return is 10%

So, how much the Treasury makes at auction is based on how much people will pay for the documents. In this example (which is a huge exaggeration), the government took on $10,000 debt but only received $5,000 into the coffers.

The amount that people will pay for the paper is based on many things. Mainly:
- The likelihood that the US Government will be able to pay the interest and repay the principle in 30 years.
- Expectations of the value of the dollar over the investments life (30 years).

So far, world markets have great faith that the U.S. is solvent (will be able to pay). That's extremely likely to continue. But, as the debt grows (currently over 8.5 trillion dollars) and the trade deficit grows, the dollar weakens on the world markets so people will pay less for the documents because their investment returns will be paid in less valuable dollars.

There is another part of this that makes things more mixed up. Social Security and Medicare are "on budget". That means their revenues and expenses go on the Federal budget. So, now, while those programs take in more than they cost, congress spends that money just like any other tax revenue without regard for the fact that in the future these programs will cost more than they bring in and so other tax revenue will have to be raised to pay the benefits.

In the past (before Reagan) the government followed a more cyclical fiscal policy. They would borrow to pump money into the economy when it was week but then they would run a surplus and pay back debt when the economy was strong. That kept the debt from growing so fast as it does now.

Since Carter, only Clinton has run a surplus (paid debt down instead of borrowing more). The economy was strong and so he (conservatively) paid down debt.

Answer 3

The government often does this. All that happens is that there are more government bonds outstanding at any given moment. That can lead to inflation or to other economic disruptions.

Currently, the US government has been running a bigger than usual deficit for a while, and a lot of those bonds are in the hands of foriegn investors and governments.

Answer 4

They print more money! ...and they run a deficit. So is the problem high spending or low taxes? Well, ask a liberal and they'll say it's low taxes. Ask a conservative and they'll point to high spending by Congress. At the end of the day, a balanced budget is what everyone wants, it's just a matter of how you get there that differs.

Answer 5

The government asks the Federal Reserve Bank for money-say a billion dollars to finance a war. The FRB (not really a bank or reserve money) gives it to the government. Since you added a billion to our economy, it causes the dollar to drop and inflation occurs. Its like making kool-aid....koolaid being the economy and water being money. When you add more water to it, it dilutes the kool-aid. It also add to the deficit of the goverment.

Answer 6

Nothing for a while, it borrows from Germany, Japan, China until it can't pay the interest on the interest anymore. then all the people who have saved will lose their money and the rich get richer and the poor stay poor. Then it starts again. A great guy like Clinton gets the Country back up on its feet and then a schmuck like doffus in power rips it all to shreds, because people love a doffus.

Answer 7

You have got to be kidding!!! Our government spends more than it takes in, on a daily basis.

They call it "deficit spending", "trade imbalance", and a host of other names. The fact is simple!! The United States owes more money to more countries than any other nation, or country in this world.

Answer 8

affect our economy and the Way we live,the USA to day owns more money to Arther countries than any other country in the planet,our grand children's and grate grand children's,will pay if we exist by that time,our beautiful country is in down foll,the last 7 years,because our stupid precedent bush.we lost all imports-exp or our manufactured is close down the dolor is worthless our sins-education is for the chicks,and so an.

Answer 9

Reagan and the deficit plus voodoo economics plus George Bush, Sr. = the election of Gore/Clinton in '92.

Answer 10

Bankruptcy

Answer 11

you go bankrupt - example, California and having to pay $10 billion each year for illegal aliens. We have a major problem and Arnold doesn't give a crap. He only want more money to be spent on the illegals.