All I really want in life is to help others understand themselves & the world around them. The “Explain Like I’m Five” series aims to bring down current issues into a consumable summary, with limited (but well informed) bias.
As the days of May count down, the United States approaches the so called debt ceiling, after which point we will no longer have the treasury funds to pay our existing debts.
Fair reaction. Bureaucracy is rarely exciting, and this issue is painfully dull. I think it’s that dullness that often obscures the absurdity of it all. So let’s break it down.
Like any business or household, the United States operates with revenues and debts. Tax revenues represent most of our revenues, but there are other sources, such as custom duties, the sale of properties or rights to resources, licensing, and more. You can read more revenues here, but it’s pretty dry.
Simply, taxes are the money we break in. To equate it to your household income, revenues are you wages earned.
Debts are what we owe; often times we do not have the cash on hand to satisfy all of our spending, so we borrow money. This is largely done through Treasury Bills, or T-bills, which are loans that the government sells to investors for a guaranteed rate of return. The government gets cash now with the promise to pay it back later, with interest.
T-bills represent what’s known as the “risk free rate”; interest rates on T-bills are almost always going to be the lowest rate out of any investment you can make, because it’s generally understood that the U.S. will not default on it’s debt; we won’t go delinquent.
Drawing back to a household example, think of this as a low interest credit card. Each month, you make payments, paying down the balance. So long as you’re not late, there’s no reason for your ability to borrow money to be compromised. You’ve always been good for it, so the gears keep turning.