These grades aren’t for students. They’re for businesses. Based on how likely the company
is to pay its debts back. A company like Microsoft has
the best grade possible: AAA. Since they have a long history
of paying people on time. "The Internet is about driving profitability." But a newer company like Tesla, has a BB rating. "Fundamentally changed the equation." "You've got to have an all electric vehicle." And that affects their interest rates. Microsoft pays its investors 2.5%. Tesla pays a bit more at 5.3%. The riskier the grade, the higher
the interest rate. But it’s not just companies that have grades:
countries do, too. The United States, for a really long time,
had a AAA rating. Until... “Lawmakers have just two days to raise the
nation's debt ceiling and avoid a catastrophic--" “Default on its loans, which could create
turmoil in the US economy and worldwide.” The US has a weird thing called “the debt
ceiling” which is just a limit on how much debt the country can take on. If the national debt reaches that limit, the
US might not be able to pay its investors. The US regularly comes close to hitting it but the government always ends up raising it. Until 2011, when it almost didn’t. After that, the US was downgraded by a credit
agency for the first time, due to quote “political risks.” Since then, Congress and the president have
had to raise it 7 more times. It’s becoming an almost annual task. And of course, it always goes super swell…. "The entire basis of the Republican strategy
is we're gonna shut down the government or cause economic chaos if we don't get
100% of what we want." "This isn't some damn game!" "My Republican friends need to stop playing
Russian roulette--" "Russian roulette with the economy." In the last 20 years, the US has borrowed
more and more money. The national debt is at an all-time high. But how should we feel about this debt? And what happens if we don’t pay it back? The US national debt is nearing
29 trillion dollars, with a capital T. Depending on when you watch this,
it might already be there. It’s best not to look at it as a number but instead as a comparison
to the size of the economy. You’ll see the US takes on more debt when
the country spends a lot: because of wars, or because of investments needed during recessions
and… now, pandemics. And the department in charge of all this
is the US Treasury. They collect taxes and spend them
to fund the government. And, for the record, it's Congress and the
President who decide how much taxes should be, and where the money should be spent. The Treasury just handles the flow of money. But for—essentially, ever—they approve
more spending than they bring in with taxes. So the Treasury has to make up that difference
by taking on debt. And it does that by selling bonds. They can vary, but generally
it works like this: You buy a $1,000 30-year bond
at a locked-in 2% interest rate. Every year the Treasury sends you $20,
the 2% interest you’ve earned. And after 30 years, you can cash out the bond
and get your $1,000 back. It’s a win-win situation. The US gets money to fund the government
and you make some profit on a safe investment. More than a third of these bonds — and therefore
the total US debt — are owned by Americans and American companies. Investors, and also banks, local governments and even pension funds keep their money
in bonds. And the largest part is owned by
the federal government. Yes, the federal government owns part of
the federal government’s debt. The money for Social Security
is actually kept in bonds. So is the money for Medicare. And federal pensions. The Federal Reserve has bonds, too. Foreign investors only own
a quarter of the US debt. And while Chinese investors
used to have the largest share Japanese investors actually own more now. They own around 4% of all US debt. And it is a lot of debt. Of all the developed countries, the US has
the fourth largest debt compared to the size of the economy. So is this… bad? The really, really frustrating answer is
we don't know. Debt has pros and cons. One question is what are you doing with the
debt? When you're in an economic recession or an
emergency not only should you borrow you should borrow a lot. But what you shouldn't do is borrow when your
economy is strong and the political inconvenience of paying for things is too high. Another really important question is
what are interest rates? FURMAN: In recent years, interest rates
have been very low. FURMAN: That tends to make it easier to borrow
and to sustain that borrowing. FURMAN: Where we are now doesn't make me,
as of now, very nervous. I worry about the debt a lot more
than he does. While all countries take on debt,
only these two have debt ceilings. Denmark’s, however, is kept so high they’re
not going to come close to hitting it. Unlike the United States, where the government
is constantly having to raise the debt ceiling to pay for spending they already approved. That’s the big problem with the debt limit,
is it's internally contradictory. FURMAN: The government passes a law that says
you have to spend 10. It passes a law that you can only collect 8 in taxes
and then it passes another law saying you're not allowed to borrow 2. If the US does hit the debt ceiling, it would
mean the Treasury couldn’t issue any more bonds. So, no more debt revenue. Taxes would still be coming in, but that’s
not enough to cover all these responsibilities. So maybe they stop paying federal employees. Or stop sending money for programs. But at some point, they won’t be able to
pay the interest to these investors or cash out Social Security bonds. That’s called a default. It’s never happened... yet. You couldn't do more to sabotage
your financial system than default. Interest rates could rise based on a reassessment
that the United States was considerably riskier than people had thought before. When government bond interest rates go up,
that usually means that other interest rates are going up. If you borrow for anything, whether it's for
a dishwasher, or a car, college, or your credit card, that's going to become more costly. We're going to lose jobs. Wages won't go up as high. We could be like these countries and just
not have a debt limit. Or have one so high it’s never a threat
to the economy. Because if Congress and the President really
want to take on less debt they can change the tax system. Or reduce spending. The debt limit does make sense if you are
a functioning Congress, you're saying we need to put in place some policy to make sure that
we don't borrow more than we mean to or we stop and we pause and we check
on the borrowing. That certainly isn't how it is working. The simplest thing would just be
to repeal it and be like almost every other country in the world. Even if the US never actually defaults on
its debt, just the mere political fights and “will they or won’t they” unease
could make the United States a less desirable place to invest. It's long been seen as this kind of the safest
asset that you can invest in, and so that's given the U.S. a lot of advantages. But the more our political system is so polarized
and dysfunctional, the more that it becomes a little bit questioned of whether the US
should have the incredible advantage that it has thus far.
