American Civics
Deficit and Debt Ceiling Basic of the deficit, debt and debt ceiling
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- Before we talk about the debt ceiling,
- it is important to realize the difference between
- the deficit and the debt,
- because these words are thrown around
- and it‘s clear that they're related,
- but sometimes people might confuse one for the other.
- The deficit is how much you overspend in a given year,
- while the debt is the total amount, the cumulative
- amount of the debt you've gotten over many, many years.
- So, lets take a look at a simplified example.
- Let's say you have some type of a country,
- and that country spends in a given year $10,
- that country spends $10.
- but it’s only bringing in $6 in tax revenue.
- So it's only bringing in $6
- So this country, in this year where it spends $10
- Even though it only has $6 to spend,
- it has a $4 deficit.
- $4, d-e-f is short for deficit
- Well let me just write it out,
- you might think it stands for defense, or something,
- it has a $4 deficit
- and you might say
- how does it spend more money than it brings in?
- how can it actually continue to spend this much?
- where will it actually get the $4 from?
- the answer is it will borrow that $4.
- Our little country will borrow it.
- Maybe coming into this year,
- the country had some debt,
- maybe it already had $100 of debt;
- In this situation,
- it would have to borrow another $4 of debt
- So, exiting this year,
- it would have $104 in debt.
- It would have $104 in debt.
- If the country runs the same $4 deficit
- the year after this,
- then the debt will increase to $108.
- If it runs another $4,
- then the deficit will increase to $112.
- Now that we have that out of the way,
- lets think about what the "debt ceiling" is.
- So you can imagine the United States
- is continuing to run a deficit-
- it‘s continuing to spend more than it brings in-
- and actually for the United States
- these ratios are appropriate,
- for every dollar that the United States spends
- 40% is borrowed,
- it only has 60% of every dollar it needs
- to spend right now,
- so it needs to go out into the debt market
- and borrow 40% to keep spending at its current rate
- so if it’s continuing to borrow,
- you can imagine that
- the debt keeps on increasing.
- So let me draw a little graph here
- So that axis is time
- this axis right over here is
- the total cumulative amount of debt that we have.
- We continue to have to borrow every 40%
- of every dollar that we're spending.
- So our debt is continuing to increase
- So our debt is continuing to increase.
- And Congress has the power,
- Congress has the authority
- to essentially limit how much debt we have.
- So right now, we have a current debt limit
- of 14.3 trillion
- and even though Congress has this authority,
- the way that it‘s worked in the past
- is its kind of just a rubber stamp;
- Congress has just always allowed the debt ceiling
- to go up and up to fund our borrowing costs;
- and if you think about it,
- that kind of makes sense,
- because right now Congress is the one that decides
- where to spend the money
- what are the obligations?
- So the debt ceiling is like, okay so, we've already agreed
- what you spend your money on
- Congress has to determine
- Congress figures out
- what we spend our money on and what our taxes are
- we've already determined how much you have to borrow,
- it would seem kind of ridiculous for us
- after we've decided what you need to borrow,
- to say that you cannot borrow it
- you cannot actually do what we've told you to do
- and so, historically,
- Congress has just kind of gone on with the flow
- Okay, yeah, we've told you
- you need to borrow more money
- to execute, the executive branch
- has to run the government
- based on the budget we've told you
- so they just keep upping it
- so last time the debt ceiling was raised
- which was actually very recently,
- February 12, 2010,
- it was raised from 12.3 trillion to
- actually 12.4 trillion to,
- to the 14.3 trillion
- this actually happens pretty regularly
- it’s happened ten times since 2001
- seventy-four times since 1962
- it‘s just a regular operating thing
- Right now, the Obama administration says
- look we've actually already come up
- against our debt ceiling
- and we want to raise it,
- and ideally the
- Obama administration wants to raise it
- by about 2.4 trillion
- so they want to raise it to 16.7 trillion
- which will kind of put it off the table a little bit
- until after the elections,
- so we don't have to debate this anymore.
- The Republicans on the other hand
- want to essentially
- use this, this is a little bit unusual, use this
- as leverage to essentially, reduce the deficit
- and not only to reduce the deficit
- but reduce the deficit through spending cuts
- and so thats why it’s become
- this big game of chicken and why we're
- going up against this limit
- and one thing you might not have realized
- we already hit that debt limit
- on May 16, 2011,
- I'm making this video at the end of July 2011
- and the only reason this country
- is continuing to operate
- has been able to continue
- to pay interest to its obligations
- to issue social security checks,
- to support Medicare
- and buy fuel for aircraft carriers,
- and all the rest is because
- Geithner, the security treasurer
- has been able to find cash in other places
- cash normally set aside
- for employee pensions and
- all the rest and
- has essentially done a little bookkeeping
- taking money from one place to
- feed another, but what he's said,
- what he's publicly said,
- is that he won't be able to do that anymore
- as of August 2, 2011;
- so this right here is the date that everyone is paying attention to,
- August 2, 2011, according to Geithner
- at that point, he won't be able to find
- random pockets of cash and shuffle around and
- what he calls extraordinary measures
- and at that point the United States
- will not be able to fulfill
- all of its obligations
- and so if you think about all of the
- obligations of the United States-
- This is a huge oversimplification here.
- So this bar is all of the obligations
- Some of those obligations are things like
- things like
- interest on the debt it already owes
- a huge amount of debt 14.3 trillion dollars
- things like Social Security,
- Medicare,
- defense,
- and then all of the other stuff
- that the country has to support,
- all of the obligations
- so as of August 2, 2011,
- we cannot issue any more debt
- and Geithner cannot,
- doesn't have any more cash around
- doing these extraordinary measures.
- The only option is to somehow
- reduce some of these things by 40%
- because 40% of every dollar we used to spend
- are borrowed so something
- over here is going to give
- we're not going to fulfill our obligations
- to one or more of these things.
- All of these things which we are legally obligated
- to fulfill that Congress has said,
- all these things that Congress
- has said we should be spending this money on
- and so at that point it is perceived
- that we would have to default
- and a default would be on any of these obligations,
- but in particular,
- we could, especially if we have to
- cut everything by 40% and we don't
- want to see retirees, you know
- not being able to pay interest on their houses
- or you know, aircraft carriers being able to have fuel
- or whatever else
- we might defer, or restructure
- or do something weird with our debt
- in which case we would be defaulting
- and i want to be clear
- a default is usually referred to as
- not fully paying interest on debt that you owe
- but it would be any of these obligations
- the United States has this AAA rating
- If the United States says
- it‘s going to give you a Social Security check-
- you trust that.
- If the United States says
- it’s going to pay that Medicare payment-
- you trust that.
- If it says it‘s going to give you an interest payment-
- you trust that.
- If it doesn't fulfill any of these obligations,
- then all of the obligations become suspect
- and the reason why this is a big deal
- is you can imagine
- if you borrow money,
- and you've always been good
- at paying back that money,
- you're going to have to
- pay lower interest
- than other people would have to pay
- but if for whatever reason,
- one day you default
- you either delay your payments,
- or you say you don't
- have the cash to pay your payments
- Then, people are like, wow
- you're a much riskier person to lend money to
- so now I'm going to increase
- the interest rates on you.
- The perception is that if the United States
- were to default on its debt,
- or any of its obligations,
- that interest rates would go up
- and the reason why
- (this would really kind of not be great)
- is because it would make the debt
- and the deficit even worse
- and then this chunk is going to have to grow
- and as new debt gets issued,
- we're going to have to pay
- more and more interest and
- thats going to make matters worse.
- It’s going to make the deficit worse,
- and on top of that,
- it‘s not just that the government
- debt will go up,
- but interest on all debts will
- probably go up,
- because government debt is perceived to be
- the safest,
- it’s the benchmark,
- a lot of other contracts are
- actually tied to government debt
- so you'll have interest rates
- throughout the economy go up
- which is exactly what we do not want
- to happen when you are in a recession
- or when you are recovering from a recession.
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At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
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