Hi, I was reading the Toronto Sun today and it mentioned Ontario is in debt again this year. I want to know how does this actually affect us. I know that in order to counter a deficit they increase taxes, but why is this necessary? Sorry if this is a dumb question, but it's something I alway think about when I read about it.
Can someone explain debt to me
- Thread starter red_leaf
- Start date
RE: Can someone explain d
Hello red-leaf nice to see you here at CanCon, debt is when you spend time instead of money,that time is from your future. Thats all I know about it, useless eh.
Hello red-leaf nice to see you here at CanCon, debt is when you spend time instead of money,that time is from your future. Thats all I know about it, useless eh.
red_leaf said:
Debt is what you owe.
So if you borrow money to buy a car, you are in debt. Same with the government.
The deficit is the difference between how much the government spends and how much it takes in as revenues. A government has to issue debt to cover the deficit. The total debt is the total amount the government has borrowed over time.
Why does it matter? That's a complex question. However, a government, like an individual or any other organization, can only borrow so much before it begins to run into financial trouble. Debt in and of itself is not a bad thing. At times, it is a very good thing. But too much debt is not good.
zoofer said:
Smokes, thats not a word I like to toss around about myself, Zoof!
An "expert" Red Leaf is Zoof with the ladies. Watch that man and learn!
Toro wrote:
Just to elaborate on what Toro wrote.
Debt is financed by Government bonds which pay a fixed amount of interest per year. This rate goes up and down depending on 2 main factors. The first is the prime rate or the bank rate which is the rate the Bank of Canada lends money to the nation's chartered banks. This rate is the base for almost all interest payments one finds in society whether it be a car loan, mortgage etc...
The secopnd factor depends on debt load. A debt load is how much debt a government or individual has compared to thier income or revenue. In the case of Governments this is determined by the debt to GDP ratio. The higher the ratio the more people will charge to loan the government or individual money becuase of the greater risk or assumed risk involved. Obviously a person who is highly in debt is less likely to pay back all his creditors or put another way has a greater probability defaulting on his payments, the same is true for governments.
Where this becomes a problem for governments is when their debt to GDP ration gets so high that the interest rate they pay rises faster than revenue and hence their interest payments go up faster than revenue. This results in a larger portion of government expenditures going towards interst payments and less towards what people need or want such as education or healthcare or pensions.
Just to elaborate on what Toro wrote.
Debt is financed by Government bonds which pay a fixed amount of interest per year. This rate goes up and down depending on 2 main factors. The first is the prime rate or the bank rate which is the rate the Bank of Canada lends money to the nation's chartered banks. This rate is the base for almost all interest payments one finds in society whether it be a car loan, mortgage etc...
The secopnd factor depends on debt load. A debt load is how much debt a government or individual has compared to thier income or revenue. In the case of Governments this is determined by the debt to GDP ratio. The higher the ratio the more people will charge to loan the government or individual money becuase of the greater risk or assumed risk involved. Obviously a person who is highly in debt is less likely to pay back all his creditors or put another way has a greater probability defaulting on his payments, the same is true for governments.
Where this becomes a problem for governments is when their debt to GDP ration gets so high that the interest rate they pay rises faster than revenue and hence their interest payments go up faster than revenue. This results in a larger portion of government expenditures going towards interst payments and less towards what people need or want such as education or healthcare or pensions.
To elaborate on the above points, and by way of example in terms of how a debt can really affect us is in terms of the Government of Canada. The current debt requires that one-fifth of revenue go to paying off its interest; that's $35.8 billion that could have been spent on programs, consumed by the debt.
RE: Can someone explain d
Trust me, we don't want debt. Debt has to be paid at some point. Also don't think what you borrow is the same as what needs to be paid in the end. When has anybody had a debt and not had interest to pay on top of it? Nobody lends money and only expect the same amount to be paid in return.
Right now the United States is running up a high debt. Especially when having to pay for their 207 billion and counting Iraq/Afghanistan war.
Their debt is being bought up by the Japanese and Chinese in a big way. Whether Americans like to acknowledge it or not, the Chinese has a huge amount of leverage by the US debt they own. They could cause a financial collapse in a way if they were to rush selling off US debt which would cause an immediate devaluation of the US economy. It wouldn’t be in the interest of the Chinese to do this however as they are a large exporter to the United States. Neither is sending the world into a recession (because the United States economy is quite global) in the interest of China’s current economic growth.
On top of this the US seems to be continually printing more money to keep up with it all. Now look at the value of their dollar. It’s been falling steadily. I remember when it was $1.56 Cdn to $1 US. in just, what? over a year and some? Now it’s $1.17 Cdn to the US dollar. To put it in perspective, that is like Canada’s economy gaining 25% strength in value to the US economy in that amount of time .
American might not feel it now, but the bill for the debt will be due at some point and those who they owe their debt to ‘will’ collect. Naturally, they are just going to pass the bill to their children and given the size of the debt, they’ll be passing it to their grandchildren too.
Kinda like living in the present by mortgaging the future.
Trust me, we don't want debt. Debt has to be paid at some point. Also don't think what you borrow is the same as what needs to be paid in the end. When has anybody had a debt and not had interest to pay on top of it? Nobody lends money and only expect the same amount to be paid in return.
Right now the United States is running up a high debt. Especially when having to pay for their 207 billion and counting Iraq/Afghanistan war.
Their debt is being bought up by the Japanese and Chinese in a big way. Whether Americans like to acknowledge it or not, the Chinese has a huge amount of leverage by the US debt they own. They could cause a financial collapse in a way if they were to rush selling off US debt which would cause an immediate devaluation of the US economy. It wouldn’t be in the interest of the Chinese to do this however as they are a large exporter to the United States. Neither is sending the world into a recession (because the United States economy is quite global) in the interest of China’s current economic growth.
On top of this the US seems to be continually printing more money to keep up with it all. Now look at the value of their dollar. It’s been falling steadily. I remember when it was $1.56 Cdn to $1 US. in just, what? over a year and some? Now it’s $1.17 Cdn to the US dollar. To put it in perspective, that is like Canada’s economy gaining 25% strength in value to the US economy in that amount of time .
American might not feel it now, but the bill for the debt will be due at some point and those who they owe their debt to ‘will’ collect. Naturally, they are just going to pass the bill to their children and given the size of the debt, they’ll be passing it to their grandchildren too.
Kinda like living in the present by mortgaging the future.
RE: Can someone explain d
I know the issue was to address provincial debt, but it all comes back down to the bottomline.
I know the issue was to address provincial debt, but it all comes back down to the bottomline.
Thank you for the explanation everybody! Essentially, it's like the government with a huge limitless credit card gone wild. Now I a reason to hate Dalton McGuinty even more so :twisted: .
Sorry you've lost me here. I don't really understand the implications here. I assume when another country picks up a portion of the debt they will set a lower interest rate, therefore satisfying both parties. Why would the they sell off the US debt, unless the US are defaulting on there debt. And how does this devalue the economy if the debt was sold off?
Sorry you've lost me here. I don't really understand the implications here. I assume when another country picks up a portion of the debt they will set a lower interest rate, therefore satisfying both parties. Why would the they sell off the US debt, unless the US are defaulting on there debt. And how does this devalue the economy if the debt was sold off?
The US debt held by foreign countries is in the denomination of the US dollar. If a sell off occurred too quickly, it would hugely devalue the US dollar and correspondingly the US economy.
http://www.safehaven.com/article-3097.htm
(excerpt...)
We need to understand how this new system has worked so well for the US. The counter parties to our trade deficit have managed the system to allow this extreme condition to continue. At the risk of oversimplification, what they are doing is providing a massive Vendor Finance program for their exports. They literally loan us the money to buy their goods. They have been doing this for decades, but have expanded greatly as we have expanded our high living by purchasing so much with our paper currency. This is patently "unsustainable" because at some point foreigners may decide they have enough of our dollars, forcing the whole system to fall apart. The dollar would devalue, and then we wouldn't be able to buy as many things we want from foreigners, like energy to drive our cars. But this feared calamity has not occurred. The US dollar has dropped some but stabilized, and US interest rates are not soaring. The system may appear stretched, but nothing has broken, so we have been lulled into believing that it may not really be a problem. Some argue that catastrophe can't happen. These optimists point out that the foreigners who have loaned us the dollars to maintain our life style, are freely doing so and are now locked in a deadly embrace where they would hurt themselves so much that they will continue extending us credit. (I'm not so sure, but I'll get to that later.) They go on to point out that the situation is almost like the Mutual Assured Destruction of the cold war, where the Soviets and the US were locked in a fearful embrace of world potential destruction: Neither side would initiate all out attack on the other, because the result would be worse for everyone. The problem for the Japanese and Chinese is that they hold so much of our debt, that if they tried to cash it in, (sell off their holding of US Treasuries) they would drive Treasuries down, interest rates up, the dollar down and be left holding big losses on their balance sheets.
http://www.safehaven.com/article-3097.htm
(excerpt...)
We need to understand how this new system has worked so well for the US. The counter parties to our trade deficit have managed the system to allow this extreme condition to continue. At the risk of oversimplification, what they are doing is providing a massive Vendor Finance program for their exports. They literally loan us the money to buy their goods. They have been doing this for decades, but have expanded greatly as we have expanded our high living by purchasing so much with our paper currency. This is patently "unsustainable" because at some point foreigners may decide they have enough of our dollars, forcing the whole system to fall apart. The dollar would devalue, and then we wouldn't be able to buy as many things we want from foreigners, like energy to drive our cars. But this feared calamity has not occurred. The US dollar has dropped some but stabilized, and US interest rates are not soaring. The system may appear stretched, but nothing has broken, so we have been lulled into believing that it may not really be a problem. Some argue that catastrophe can't happen. These optimists point out that the foreigners who have loaned us the dollars to maintain our life style, are freely doing so and are now locked in a deadly embrace where they would hurt themselves so much that they will continue extending us credit. (I'm not so sure, but I'll get to that later.) They go on to point out that the situation is almost like the Mutual Assured Destruction of the cold war, where the Soviets and the US were locked in a fearful embrace of world potential destruction: Neither side would initiate all out attack on the other, because the result would be worse for everyone. The problem for the Japanese and Chinese is that they hold so much of our debt, that if they tried to cash it in, (sell off their holding of US Treasuries) they would drive Treasuries down, interest rates up, the dollar down and be left holding big losses on their balance sheets.
elevennevele wrote:
Just to elaborate again the sell off would cause American intersts rates to rise dramatically because a selloff would indicate that a higher rate is needed in order to entice people to buy American bonds.
.
Just to elaborate again the sell off would cause American intersts rates to rise dramatically because a selloff would indicate that a higher rate is needed in order to entice people to buy American bonds.