I can't get my head around the concept.
This question didn't help much either.
Could you please explain what it really means? and why is it bad to pay it off and have zero national debt?


2 Answers 2

  1. You borrow \$100 from John, at 3% interest per annum. You are indebted to John, to the tune of \$100.

  2. The Wakanda government borrows \$100M from the public, at 3% interest per annum. The Wakanda government is indebted to the public, to the tune of \$100M.

Conceptually there is no difference between (1) and (2).

But in practice, (1) is more likely to be informal. Maybe the agreement between you and John is not even written down and is simply verbal. Or maybe it is casually scrawled on a scrap of paper.

Whereas (2) is more likely to be formal. Indeed, officially, governments don't call it "borrowing". Instead, they say that they "issue bonds". Anyone in the "public" (including Joe on the street or the Chinese government) is free to buy these bonds. If say the bonds are one-year bonds that pay 3% interest per annum, then the government promises to repay the bond-holders $103M in a year's time.

why is it bad to pay it off and have zero national debt?

I don't think any economist believes it is "bad to pay it off and have zero national debt". Instead, as with most questions in economics, the answer is "It depends." You can have too much debt or too little debt. Having zero national debt is neither always ideal nor always bad.

But in practice (i.e. in the real world), many governments tend to err on the side of having too much debt.

  • $\begingroup$ Can you add a case where zero debt is bad for the nation? $\endgroup$
    – yathish
    Apr 21, 2018 at 4:31
  • $\begingroup$ @yathish: Yes, for example, a young and developing country might want to borrow to fund its industrialization drive. And so it might not be a good idea to insist on zero debt for such a country. $\endgroup$
    – user18
    Apr 21, 2018 at 4:43
  • $\begingroup$ @KennyLJ sorry to revive such an old question. But what about the following scenario: Imagine a country that utilizes 50% of its revenue to pay for annual interests. By simply making an extra effort in order to pay the debt sooner (for example, creating a new tax just for this), in the next fiscal year, the country would actually have more money to spend (it could utilize the extra budget to pay the debt even sooner or spend it on something else). In this case, would striving for 0 debt make sense? $\endgroup$ Apr 16, 2020 at 20:20
  • $\begingroup$ @NicolasCaous: Again, it depends. And in this case, it depends in particular on whether by repaying that \$1 in debt this year, the marginal benefit exceeds the marginal cost. $\endgroup$
    – user18
    Apr 17, 2020 at 0:39

The concept makes more sense when you consider taxation and how that plays into the national debt. For example, if the government intends to spend 100 dollars, and only collects 50 dollars in taxes, the government has a deficit of 50 dollars. If the government does the exact same thing the next year, it has another deficit of 50 dollars. That brings the total national debt to 100 dollars. It makes even more sense when you consider the fact that the government can issue bonds to fund whatever it did not collect in taxes. A central bank can also buy bonds from bond holders if it wants to expand the money supply (stimulus), and allow the government to potentially spend more money that it does not collect directly from taxation.

I know that this is a simplified model, but it explains the broader concept, that whatever a government does not collect in taxes, it must borrow. When it borrows, it must repay. When it has liabilities to repay, we can call that debt. When it does not want to raise taxes to repay those liabilities, the federal reserve can step in and buy bonds which increases the money supply, and can create an inflationary scenario.


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