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Thread: Can the NATIONAL DEBT be demystified?

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    Veteran Member Lumpenproletariat's Avatar
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    Can the NATIONAL DEBT be demystified?

    I need an answer to this question:

    How is the principal on the National Debt paid back? (not the interest)


    What am I missing?

    Doesn't the PRINCIPAL have to be paid back just as the INTEREST is?

    Every year the current interest is paid back and is stated in the Federal Budget Pie Chart. Simple.

    But doesn't the PRINCIPAL also have to be paid back, every year? I.e., the current principal due to the lenders? Why isn't there also a place in the Federal Budget pie chart indicating payback of the current principal due to the bondholders?

    Why is it so easy to find where the money comes from to pay the current interest, but there's nothing to show how the PRINCIPAL is paid? i.e., where the money comes from? Isn't the current principal paid also, to the lenders, just as the interest is?





    (Does the above image show? not sure if these show on all screens -- someone advise me if it's a blank.)

    Maybe there's a "roll over" of some kind, where the new lending replaces or pays back for the previous lending. And yet, all the new borrowing/lending, or the current federal deficit, is used to pay for the current federal budget, not to pay back principal due to the lenders from years earlier.

    So, what am I missing? I can remember as a kid cashing in a $25 bond, given to me by my grandma, and I was paid not only the interest, but the entire principal + interest = $25.00. Those bondholders are paid back not just interest (which is shown in the pie chart), but also the principal. So, where is this payback shown somewhere, and where does the money come from? For the interest payment the money comes from the current total government revenues (tax revenue + new borrowed money). So, where does the money come from to pay the principal which must also be due and must be paid in order to not default to the individual bondholder?



    I am very annoyed at the difficulty of finding an answer to this question. It's so easy to explain how the interest is paid, and paying the interest is a common topic. Yet paying back the principal is never discussed anywhere. It's as though somehow it's not ever paid, and is just out there, in Limbo, as an eternal debt that is never paid back. And yet that doesn't make sense.

    What is the explanation for this?



    I asked this question once at the Reddit site. The first response was from some expert who supposedly understood everything, and he rattled off a barrage of national debt talking-point facts. But when I responded and asked specifically how the PRINCIPAL is paid back, he disappeared.

    I know that the total national debt -- now around 25 trillion -- is not all the annual deficits going back to 1776, all added up and totaling 25 trillion. No, most of that past borrowed money has been paid back, to the lenders. It's not true that the lenders all the way back to the beginning have never been repaid. That's ridiculous. Somehow most of them were paid back. So, where did the money come from? Why is this not shown in the pie chart like the interest payment is?

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    Contributor skepticalbip's Avatar
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    The principle is constantly being paid back and new debt constantly assumed. The debt is like the amount that someone that does not know how to handle money constantly carries on their charge card. They are constantly paying back the balance plus interest but borrowing more to keep the balance close to the limit.

    Example:
    Buy a treasury bill and the treasury has taken on the debt. You have lent them the purchase value of the bill. When you redeem the bill, the treasury has repaid that debt plus the interest. But in the meantime others and/or yourself are buying new treasury bills so lending the treasury money. The cycle continues.

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    Veteran Member Lumpenproletariat's Avatar
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    Quote Originally Posted by skepticalbip View Post
    The principle is constantly being paid back and new debt constantly assumed.
    Isn't that also true about the interest (constantly being paid)? which is shown in the pie chart? The new debt being assumed is paid out for the current budget items, including interest due. But how is it going to pay back previous principal due? What am I not seeing?


    The debt is like the amount that someone that does not know how to handle money constantly carries on their charge card. They are constantly paying back the balance plus interest but borrowing more to keep the balance close to the limit.

    Example:
    Buy a treasury bill and the treasury has taken on the debt. You have lent them the purchase value of the bill. When you redeem the bill, the treasury has repaid that debt plus the interest.
    But has repaid it from where? Is it paid out of current total revenue (tax revenue + borrowing)? The interest is paid from current total revenue, and is shown in the pie chart. Why isn't the payment of principal to the lenders also shown in the pie chart?


    But in the meantime others and/or yourself are buying new treasury bills so lending the treasury money. The cycle continues.
    But in the case of the cycle of paying the interest, we see where the money comes from to pay that interest -- i.e., from the current total revenue (tax + borrowing). We see in the pie chart that the interest is paid from this current total revenue along with all the other budget items. So why isn't the payment of PRINCIPAL also shown in the pie chart? Is it actually there in the pie chart somewhere and I can't see it? It's a much larger figure than the interest payment.

    Thanks for responding. Do you see what I'm missing? I'm assuming both interest and principal are paid to lenders, with no essential difference between the two. For both there has to be a source where it comes from.

    Is there a fundamental difference between paying back the principal and paying the interest to the lenders? I'm not seeing it.

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    You are asking what the creator of that pi chart means? I don't even know if the creator knew what he was doing. I would assume that what the treasury means by payments "servicing the debt" would be analogous to the payment someone makes on their credit card debt (interest + a percentage of the debt) and, for the treasury, it comes from the government's source of income, primarily taxes and borrowing with some printing of fiat currency (inflation).

    ETA:
    Venezuela went heavy on printing fiat currency (the tax base had been destroyed, their oil industry failing, and they couldn't borrow) causing run-away inflation making the Bolivar almost worthless.

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    Veteran Member Lumpenproletariat's Avatar
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    Quote Originally Posted by skepticalbip View Post
    You are asking what the creator of that pi chart means? I don't even know if the creator knew what he was doing. I would assume that what the treasury means by payments "servicing the debt" would be analogous to the payment someone makes on their credit card debt (interest + a percentage of the debt) and, for the treasury, it comes from the government's source of income, primarily taxes and borrowing with some printing of fiat currency (inflation).
    If it's (partly) from taxes and borrowing, it should be shown in the pie chart, like the interest payment is shown, as part of the federal budget.

    So your answer in effect is that it's some kind of money creation like simple "printing" of currency. I.e., the same as printing bills like the Germans did in the 1920s, and this is the source of money to pay back the principal?

    I thought they didn't do this (not since Lincoln in the 1860s). I thought they just ran up some debt (owed to the lenders) and then repaid it + interest, though always borrowing still more so there's always net debt continuing, but still paying it when due, and continually owing more which is due later -- so still any part of it gets paid back to the lenders when it's due, paid from new debt or new tax revenue, without "printing" it. BUT, then there needs to be a source from which to make the payments -- and there is no such source? there's only "printing" of money somehow?

    So you're saying there's no source except to just "print" it as needed, like the Germans paid their debt in the 1920s. I thought that had been rejected (in advanced countries) as a way to pay for anything. I hope that's not the explanation. I hope they are not simply "printing" money like running the printing presses to pay however many billions or trillions are currently needed. I think almost everyone assumes that's not how they do it.


    ETA:
    Venezuela went heavy on printing fiat currency (the tax base had been destroyed, their oil industry failing, and they couldn't borrow) causing run-away inflation making the Bolivar almost worthless.
    That's why hopefully this is not how the U.S. repays the principal.

    I think somehow the principal is really paid, without simply "printing" the money. And the total debt increases as more and more is borrowed, but then it has to be paid back later -- and how is that done?

    I hope there's an explanation how the principal is paid, so there's no default, and yet not by "printing" it the way the Germans did in the 1920s.

    It can't be from tax revenue and new borrowing, because in that case it would be shown in the pie chart. Those pie charts cannot just be someone's fantasy. I assume they're reliable, showing what percent of the budget goes to each category of spending.

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    Quote Originally Posted by Lumpenproletariat View Post
    Quote Originally Posted by skepticalbip View Post
    You are asking what the creator of that pi chart means? I don't even know if the creator knew what he was doing. I would assume that what the treasury means by payments "servicing the debt" would be analogous to the payment someone makes on their credit card debt (interest + a percentage of the debt) and, for the treasury, it comes from the government's source of income, primarily taxes and borrowing with some printing of fiat currency (inflation).
    If it's (partly) from taxes and borrowing, it should be shown in the pie chart, like the interest payment is shown, as part of the federal budget.

    So your answer in effect is that it's some kind of money creation like simple "printing" of currency. I.e., the same as printing bills like the Germans did in the 1920s, and this is the source of money to pay back the principal?

    I thought they didn't do this (not since Lincoln in the 1860s). I thought they just ran up some debt (owed to the lenders) and then repaid it + interest, though always borrowing still more so there's always net debt continuing, but still paying it when due, and continually owing more which is due later -- so still any part of it gets paid back to the lenders when it's due, paid from new debt or new tax revenue, without "printing" it. BUT, then there needs to be a source from which to make the payments -- and there is no such source? there's only "printing" of money somehow?

    So you're saying there's no source except to just "print" it as needed, like the Germans paid their debt in the 1920s. I thought that had been rejected (in advanced countries) as a way to pay for anything. I hope that's not the explanation. I hope they are not simply "printing" money like running the printing presses to pay however many billions or trillions are currently needed. I think almost everyone assumes that's not how they do it.


    ETA:
    Venezuela went heavy on printing fiat currency (the tax base had been destroyed, their oil industry failing, and they couldn't borrow) causing run-away inflation making the Bolivar almost worthless.
    That's why hopefully this is not how the U.S. repays the principal.

    I think somehow the principal is really paid, without simply "printing" the money. And the total debt increases as more and more is borrowed, but then it has to be paid back later -- and how is that done?

    I hope there's an explanation how the principal is paid, so there's no default, and yet not by "printing" it the way the Germans did in the 1920s.

    It can't be from tax revenue and new borrowing, because in that case it would be shown in the pie chart. Those pie charts cannot just be someone's fantasy. I assume they're reliable, showing what percent of the budget goes to each category of spending.
    You seem rely entirely too much on the pi chart to understand, and seem to assume that it is absolutely correct and fully explains federal finances.

    The overwhelming percentage of "debt service" is from taxes and borrowing. The Fed works to keep inflation below 3% so that, in no way, could be a significant part of "debt service".

    And you are wrong about the U.S not printing fiat currency since Lincoln. The U.S. went off the silver standard during Kennedy's administration so the value of the currency is now only backed by "faith" in the U.S. During the Eisenhower administration we were on the silver standard and the currency was backed by precious metal... During that time a 3% inflation rate would have freaked out financial markets.

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    Veteran Member Lumpenproletariat's Avatar
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    No "principal"?

    I have just been told that there is no principal paid to the bondholders. Is that correct? That changes everything.

    But then how is a treasury bill profitable? All you get is 1 or 2 or 3% annual interest over many years? Does it keep going as far into the future as you want to keep just getting the interest? It could take 20 or 30 years to get back the "principal" then? Why wouldn't a cd account be more profitable?

    So that's all the "national debt" is? Just paying back the interest on those bonds which never "mature" but just pay back a small % of interest every year?

    Is that all it is?

    So if you buy $100,000 in bonds, at 2% per year, you start getting $2000 per year. So in 50 years (or maybe 30 or 40) you finally get back your $100,000? No profit yet, just recover the "principal"?

    OK, maybe the interest rate fluctuates up and down, but still it's only 2 or 3 or 4%. Takes decades to recover your original investment?

    I think I'm still missing something.

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    Contributor skepticalbip's Avatar
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    Quote Originally Posted by Lumpenproletariat View Post
    ... snip ...

    I think I'm still missing something.
    Well, at least you got that much right.

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    Principal is a liability while interest is the expense. You wouldn't see liabilities on an expense chart. That's about as simple as I can make it.

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    The answer is very simple, I think. If you look at the total Spending (pie-chart) and subtract the total Revenue (pie-chart), the difference, if positive, is the increase in government debt. If the government repaid more principal than its additional borrowing then this difference would be negative. So you can determine the number you seek that way.

    You see the same thing on business income sheets or Form 1040. Interest paid or received may be an expense or income, but changes in principal go unmentioned.

    It may seem odd — interest and principal payments have similar character — but that's the way it is. (With effort I think you can Google up details of Treasury debt issues and retirements if you really need them.)

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