Why America Keeps Borrowing Money

America keeps borrowing money because it needs to cover its massive national debt, which has exceeded $28 trillion. This staggering figure is a result of years of overspending and under-saving.

The government's annual budget deficit has been a major contributor to this debt, often exceeding $1 trillion. In 2020, the deficit reached a record high of $3.1 trillion.

The government's reliance on borrowing is also driven by its inability to generate enough revenue through taxes. The tax-to-GDP ratio in the US is lower than in many other developed countries, making it challenging for the government to balance its budget.

Discover more: Is Borrowing Money a Bad Idea

The U.S. government has run a deficit in 77 out of the past 90 years, under governments run by both parties. So far, the U.S. has always been able to pay its debts.

The size of a budget deficit in any given year is determined by two factors: the amount of money the government spends that year and the amount of revenues the government collects in taxes. Both of these factors are affected by the state of the economy, as well as by the tax and spending policies enacted by Congress.

During tough times like the COVID-19 pandemic, government spending must increase, and tax revenues tend to decrease. This can cause the deficit to spike.

The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are backed by the full faith and credit of the United States government.

Investors can easily trade Treasury securities because there are many people interested in buying and selling them at any given time. This leads to lower borrowing costs (interest on the debt) for the government.

Here are some reasons why investors find Treasury securities attractive:

A deficit occurs when the federal government spends more money in a year than it brings in. The federal debt - also referred to as the national debt – is the total amount the government still owes from current and past deficits.

The federal government borrows money by selling bonds and other securities to the public. These securities are attractive to investors because they are backed by the full faith and credit of the United States government.

The government issues securities such as bills, notes, and bonds through the Treasury, which are offered in a wide range of maturities. This makes it easy for investors to trade these securities, as there are many people interested in buying and selling them at any given time.

Investors are willing to pay more for the safety and liquidity of Treasury securities, leading to lower borrowing costs for the government. This is because investors can easily trade these securities, making them a safe and attractive investment.

The national debt is the accumulation of the government's borrowing along with associated interest owed to the investors who purchased these securities. It's similar to a person using a credit card for purchases and not paying off the full balance each month.

Here's a breakdown of how the government borrows money:

The government uses the money it borrows to cover the outstanding balance of expenses incurred over time, resulting in a budget deficit. To pay for this deficit, the government sells marketable securities such as Treasury bonds, bills, notes, floating rate notes, and Treasury inflation-protected securities (TIPS).

Managing debt is a complex task, especially for the US government. Treasury's overarching debt management goal is to ensure the federal government's financing needs are met at the lowest cost to taxpayers over time.

To achieve this goal, Treasury issues a variety of marketable securities in sufficient amounts to ensure the liquidity of each, and maintains a regular and predictable auction schedule. This schedule provides investors with greater certainty and better information with which to plan their investments.

However, constantly changing financial markets pose a significant challenge to Treasury's debt management efforts. If the Treasury offers too much of any given security, it may have to pay a higher yield to attract investors.

The uncertainty about the debt limit also creates debt and cash management challenges for the Treasury. Treasury has often used extraordinary actions, such as suspending investments or temporarily disinvesting securities held in federal employee retirement funds, to remain under the limit.

Managing debt requires a thoughtful approach to ensure the federal government's financing needs are met at the lowest cost to taxpayers over time. Treasury issues a variety of marketable securities in sufficient amounts to ensure the liquidity of each, and maintains a regular and predictable auction schedule.

This schedule provides investors with greater certainty and better information with which to plan their investments. The Treasury's goal is to achieve this by providing a regular and predictable auction schedule.

Constantly changing financial markets can make debt management challenging. If the Treasury offers too much of any given security, it may have to pay a higher yield to attract investors.

Uncertainty about the debt limit can create debt and cash management challenges for the Treasury. Delays in suspending or raising the debt limit can create challenges for the Treasury.

Treasury needs to consider the mix of longer-term and shorter-term securities that it offers to manage its debt portfolio. Longer-term securities typically have higher interest rates but provide more certainty.

Returning to a debt-free life requires a solid plan. Start by making a list of all your debts, including the balance, interest rate, and minimum payment for each one.

You can't tackle debt without knowing what you're working with, so take the time to gather this information. Review your credit card statements, loan documents, and bank accounts to get the facts.

The 50/30/20 rule suggests allocating 50% of your income towards necessary expenses, 30% towards discretionary spending, and 20% towards saving and debt repayment. This can help you prioritize your debt repayment.

Cutting expenses and increasing income can free up more money in your budget for debt repayment. Consider ways to reduce your spending, such as cooking at home instead of eating out.

Debt consolidation can simplify your finances by combining multiple debts into one loan with a lower interest rate. This can save you money on interest and make it easier to manage your payments.

By focusing on paying off high-interest debts first, you can save money on interest and make progress on your debt faster. This is often referred to as the debt avalanche method.

A fresh viewpoint: Earn Free Money

The national debt is essentially a credit card for the federal government, where they borrow money to cover expenses when revenue falls short.

Think of it like this: when you use a credit card for purchases and don't pay off the full balance each month, you're essentially running a deficit. Similarly, when the federal government experiences a budget deficit, they borrow money by selling marketable securities like Treasury bonds.

A budget deficit occurs when spending exceeds revenue in a given fiscal year. For example, if the federal government spent $500 and only had $400 in revenue, the deficit would be $100.

Here's a breakdown of how the deficit can add up over time:

As you can see, the deficit can grow over time, leading to an increase in the national debt.

Asset-based lending, or ABL, is a type of financing that uses a company's assets as collateral to secure a loan. This approach is often preferred by businesses with strong assets but uneven cash flow.

With ABL, a lender will focus primarily on the value of your business's assets, which are used as collateral to secure a loan. These assets can include accounts receivable, inventory, machinery and equipment, real estate, and intellectual property.

Companies with substantial assets may find ABL provides access to significant financing with a covenant-light structure, offering a level of flexibility in making business decisions that may not be possible with other types of loans.

The process of borrowing with ABL involves field examinations to determine the level and quality of your financial and physical assets. This includes an inventory appraisal to determine the eligible collateral and advance rates against them.

One advantage of ABL is the relative freedom from covenants that usually come with cash-flow lending. This means you'll only need to maintain a minimum level of liquidity to avoid being subject to a financial covenant.

Companies that can benefit from ABL include those with an asset-rich balance sheet, varying cash flow, and a need for capital.