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As far as I know, debt is a way to get hands on extra money which will burden the future governments.

  1. What if every successive government keeps adding to the national debt?

  2. Isn't it like free money? You can win by developing the country and keep adding to the debt as well... maybe forever?

  3. The US has a debt of $18 trillion. How has it affected United States? Why should the government even bother to repay?

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  • $\begingroup$ Short answer: look at the recent (ie. last couple decades) history of Japan. $\endgroup$ – Mason Wheeler Aug 4 '16 at 20:26
  • $\begingroup$ I have never seen a satisfactory explanation of why the likes of Weimar or Zimbabwe experienced hyperinflation, yet "impossible" negative interest rates abound in economies pumped full of QE money. Sure, Weimar and Zimbabwe were/are not credible, but that strikes me as a very ad hoc explanation and therefore entirely unsatisfactory. It seems to me that the real answer, the explanation that underlies the differences in credibility, must be extremely complex and depend on many factors. $\endgroup$ – user7935 Aug 22 '16 at 14:32
  • $\begingroup$ I recommend Carlo Cottarelli's What We Owe: Truth, Myths, and Lies about Public Debt (2017). $\endgroup$ – Kenny LJ Aug 5 '19 at 7:22
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What happens to a country with debt depends on several factors.

  1. Debt to GDP ratio
  2. Credibility

Debt is not exactly free money. It is 'free' money (apart from interest) only if you can be depended on to pay back that debt. In other words, investors are willing to lend money to a government if they are sure that the government will pay them back. Failing to pay back your debt would require your country to declare bankruptcy (or drop out of the global financial system altogether).

The reason why governments like the U.S. can keep borrowing money is because investors believe that the U.S. can easily make enough money to pay them back in the future. This is based on the debt to GDP ratio. If your debt to GDP ratio is too high (say, 10 to 1) that means it might be quite difficult for the country to pay back all that debt. The current U.S. debt to GDP ratio is between 0.7 and 1.0, which is relatively high (a result of the Great Recession).

Another smaller country might not be able to easily borrow with such a high debt to GDP ratio, but the U.S. also has credibility - it has not defaulted on its debts before, unlike some other sovereign states (Argentina). Combined with the fact that the U.S. has large financial clout and is relatively important, investors feel that the U.S. government is unlikely to default on its debts.

If the U.S. government were to keep on borrowing money, eventually people would get a little concerned with the amount of debt it has taken on.

It's possible to think of sovereign debt in a similar way to personal (your) debt. For example, if you own a credit card, you can use that credit card to get 'free' money and use that money to purchase things. The reason why banks are willing to lend you this money is because you have previously paid them back. If you were to (1) ask for a lot more money than you make (e.x. $100 million) or (2) ask for money after failing to pay the bank back at the end of the month, the bank would reject you. Investors, like the bank, require governments (and individuals like you) to meet some requirements before they are willing to lend you money.

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    $\begingroup$ A key difference between personal debt and sovereign debt is a matter of scale. In many cases (such as the USA), enough debt has changed hands that our creditors have an interest in keeping the market stable so that their investments are still worth something. If we devalue our currency to nothing, they lose too. At some point they become less of a creditor and more of a partner. Many of the principles are the same, but some of the strange oddities that show up at the sovereign level are because of this effect. $\endgroup$ – Cort Ammon Aug 3 '16 at 23:59
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    $\begingroup$ In the personal debt case, the scales are manageable enough, and concepts like debt collection agencies (which pay pennies on the dollar for debt) work because the creditors can stomach some loss. In the sovereign case, it can be much more painful to stomach such losses, so they have to rely on different solutions. $\endgroup$ – Cort Ammon Aug 4 '16 at 0:00
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If a government owes money to domestic or foreign entities and does not repay that debt then the government's credibility — just like any other borrowing entity's credibility — as a reliable economic entity takes a hit. As a consequence when it wants to borrow more money in the future, the lending entities either charge a higher interest rate to cover the risk or refuse to lend to avoid the risk altogether.

Here's the only difference — governments can print their own currency unlike other entities. But too much currency in circulation will cause inflation, which is bad for the economy. So it is in the government's own interests to repay its debt, as it is to borrow money in the first place.

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    $\begingroup$ Why is U.S economy still alive? 18 trillion $! That is more than its GDP! $\endgroup$ – Yashas Aug 3 '16 at 18:43
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    $\begingroup$ @YashasSamaga not all of that debt is due within the next year - some of it is due in 5, 10, or 30 years $\endgroup$ – Kontorus Aug 3 '16 at 18:44
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A debt is considered a lot when the borrower defaults on that debt. Why? Because countries just like companies and individuals must not borrow more than it could pay back. The lower debt to GDP ratio, the better.

The most important factor to borrowing country's credibility is its ability to pay back loans plus interest on schedule. This is achieved in two ways which can be used in parallel:

  1. Indirect tactical finance by lending to local startup companies and projects at interest rate not less than the foreign borrowing interest rate. Here the government lends the private sector to jump-start new projects that should enhance country's economic development, by increasing GDP in the short term.
  2. Direct strategic finance by starting new public sector owned and operated projects or in partnership with the private sector. These projects focus on comprehensive economic development, which must enhance industrial and agricultural growth, to a point where country's exports grow allowing more foreign currency to flow into the country, which is later used to service the foreign debt and increase GDP, reducing the percentage of external debt-to-GDP.

The most important factor in external or foreign loans is that it is spent on income producing projects not public operational expenses or military uses. This is where under-developed countries go wrong because they don't understand how to plan their priorities properly.

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If you brorrow from your own people like US then you can write it off when they die.. like baby boomers and social security. Soon, they'll force IRA's for bank influx and tax write offs. This will continue to boom the stock market, keep interest rates reasonable, and allow people to buy homes with increasing value which is the most crucial part of the GDP.

Foreign debt, is far more insidious. You don't know what could be lurking around the corner, good or bad.

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