US doesn’t have to pay off its debts. Really?

The debt ceiling occupies the news these days. It sparks a lot of very interesting discussions. The Nobel Prize winning economist Paul Krugman said so in an op-ed in New York Times. Here are the reasons.

First, country doesn’t die like a person so it can continue to pay off its debt, so we should not compare country debts to households’ debts.

Ther are still many similarities between household debts and government debts. One thing for sure, there is rating for credit worthiness. If someone or a country doesn’t pay the debts on time or have high risk to default, the interest rate is higher certainly. Moreover, there are big differences among countries. That’s why US is so lucky. Its status as reserve currency is the prime example of its exceptionalism. That is why other countries keep buying the US government debts or US treasury bills or bonds. Countries don’t just hold cash because it devalues due to inflation. They have to invest in something with some return, so they invest in the safest security US government bonds. From this point of view, US government debt is different from average household debt. However, it is similar to personal loan to the richest people in the world such as Elon Musk or Jeff Bezos because they are less likely to default on their personal loans.

Second, the interest US paid last year is only 1% of its GDP. I recalled the threshold to approve mortgage is whether the housing related costs are under 30% of the gross household income. Mortgage payments including such as principal, interest, property taxes, heating costs, condo fees, etc.  It is not apple ot apple comparison. However, 1% is still far away from 30%. It doesn’t seem US can’t service its debts.

Third, Krugman cited an example that UK is still servicing hits debts from Napoleonic war. LOL! Didn’t know that. That’s the benefit of a country who can’t die. Or is it a curse? Is this even financially sound?

Only one week away from June 1st deadline to raise the debt ceiling. Perhaps I should hold off buying anything at this moment in case the market crashes? Don’t plan to sell anything either because it might be a nothing burger. Not going to make big financial move on speculation. However, small move is OK. 😊 Can’t wait to see. I should be more serious because if it happens, many people’s interests on their mortgage or loans might have to be increased. Always poor people suffer more. Always the people with less resource get harmed more. Let’s pray.

Published by Worthfy

Financial literacy and counselling

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