Debt and deficit

I love the language of economics. It sounds so simple in the news reports. It's easy to get het up about the facts and figures they present, but often - no, let's be honest here, always they're presented without context or definition.

Two common words of the moment are debt and deficit.

If you earn $1000 this month, but spend $1500, then your deficit is $500.
After one month, your debt will also be $500.
After two months, your debt will be $1000.
So "deficit" is how much you're losing, while "debt" is how much you've lost in total so far.

When politicians talk about reducing the deficit, they are saying two things:

  1. they currently spend more than they take - they are losing money
  2. they want to lose less money next time.

They are not talking about paying off the debt. That would require a surplus for many many years, and is considered so far-fetched that nobody is even suggesting it.

The country has so much debt that nobody is talking about reducing it.

The USA has $16,000,000,000,000 of debt.
The UK has £1,000,000,000,000 of debt.

Now, obviously, as a top customer of the banks, we're getting a good rate here. We're paying just over 4% on that.

That's $640billion and £40billion respectively. Paid out. Every year. To banks and investors.

The only reason we're not all bankrupt is that this is considered an affordable sum. But is it? Do those numbers look reasonable to you?

Maybe they do. If so, could you lend me a billion dollars?

When the media talk about "getting a grip" on the deficit, and having "control" of the economy, they are just looking at the detail. Cut the deficit by even 50% in ten years, and you've still just got more debt.

What you want to do is cut the deficit by more than 100%, so you're taking more than you're spending, and you can stop paying some of that huge interest bill.

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