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16

Most of the same considerations apply to countries as apply to businesses and people, plus a couple of extra cons Pros of Being Debt Free No interest payments Not beholden to someone else (financial freedom) Cons of Being Debt Free Buying things on (interest free) credit can save a little money Paying for things in installments can match costs to income ...


16

The reason that lenders dislike early repayments (known as "prepayments" or "voluntary prepayments") is that most lenders match their assets— the loans they've made to others— with liabilities of their own. This can lead to lenders facing significant interest rate risk. This is important to understand— while default risk is certainly significant, interest ...


16

The short answer is No. Every single year, except 2009, for the past 55 years of continuously recorded economic history, the world has been getting richer. The -2.1% global recession in 2009 was made up in 2010 with 4.1% growth. I was just working with the World Bank's World Development Indicators, which track global GDP growth, and I double checked. We ...


12

Yes, upon the introduction of the euro on January 1, 1999, all debt (indeed, all nominal contracts) in participating countries was converted from national currency to euros at a legally defined conversion rate. See this press release from December 31, 1998, which states: In accordance with Article 109l (4) of the Treaty establishing the European ...


11

You have to understand how international debt works. These are not loans, but bonds. China buys a US bond for e.g. 98 USD. This bond is a promise by the US treasury to pay 100 USD one year from now. China owns a lot of this type of bonds. Once the bond hits maturity, China is paid 100 USD and the thing it typically does with these 100 USD is it buys the same ...


10

There is an interesting report that circulated during the Clinton administration, when we predicted we'd pay off all the debt, that I think answers your question. (here's a public radio article about it) The main takeaway is that government bonds are the safest and most liquid asset. Its existence is necessary for a large number of financial institutions (...


9

The classic answer here would be Libya and Brunei, but I think Libya now has debt. Brunei is a strange case in that it uses a joint currency with Singapore dollar, controlled by the monetary authority of Singapore, so in effect you can use Singapore debt as a substitute for Brunei dollar investment. Not having any debt, and having a free currency is ...


8

Yes, I imagine there's reason to contest that claim. Consider the GDP to debt ratio. While it has risen over time and with the recent recession, it was not too far away from Germany which is considered, I think, the absolute picture of fiscal health. Consider also the critical point that the US government does not have a chance of death like a normal ...


8

As you have pointed out: where it comes from is very important. As to the Japanese situation it is quiet different from the US position from example. In fact most of the Japanese debt is owned by Japanese people (90% of the current debt). More specifically the BoJ plays a big role as a buyer, and puts pressure on Japanese yield, which makes it cheaper for ...


7

1) Debt matters because it smoothes (or unsmoothes) taxes over time, which matters because the deadweight loss from taxation is (roughly) proportional not to the tax rate, but to the square of the tax rate. 2) Because family sizes are not homogeneous, government debt (which transfers the tax burden to future generations) can redistribute the tax burden ...


7

Whether a country's debt is sustainable is a difficult question to answer. Bohn developped a framework for answering this question and the cited paper is a summary of much of its findings. Henning Bohn, 2005. "The Sustainability of Fiscal Policy in the United States," CESifo Working Paper Series 1446, CESifo Group Munich. Bohn proposes to estimate a ...


6

Yes it can. If debt originates from the banking system, then it potentially has a side effect of money creation. Whether or not money is actually created when a bank loan is made depends on the banking system's regulatory framework, and the lending policies of its banks, and these can vary widely. However if there is net excess of bank lending over bank ...


6

The fundamental reason, beyond any details about shifting interest rates, is that lenders are in the business of lending money. If you pay off the loan early, then they're doing less business. If you pay off part of the loan, you're paying less interest, which means they have to go out and find another source of income to replace you. Extreme case, suppose ...


6

Handing out the principal amount of debt gradually, in increments, is standard practice in investment loans extended by a bank to a corporation. The rationale is clear : the corporation wants to make an investment, say a new factory. The whole plan is laid out and the cash flows of the pre-operational, construction period are also detailed, based on ...


6

I don't think you can sensibly discuss this without including two additional factors: what is the prevailing interest rate? is the debt in local or foreign currency? The first affects the cost of repayments. Interest rates are at record lows in the developed world. How much money is it reasonable to borrow at 0%? What about -0.1%, is there even a limit ...


5

Suppose your country holds debt equal to thirty percent of GDP and that the government is obliged to pay interest of five percent per year on that debt. This implies that each year the cost of servicing the debt is 1.5% of GDP. Thus, if the country's GDP grows at a rate of 1.5% then it can afford to service the debt indefinitely without the debt/GDP ratio ...


5

There is some concern about the interest rates (currently at -0.5%) fueling a housing bubble in Sweden. This article at Fidelity states: In a bid to track the ECB, Sweden has cut its interest rate below zero, a radical move that involves charging banks to hold some types of deposits with the aim of encouraging them to lend. Similar trends have ...


5

The most famous perpetual bonds are UK Government Bonds known as consols. They weren't issued to avoid the rollover risk you highlight. Rather, their key benefit was liquidity. They could sell new consuls on the same terms as the old consuls and they have enhanced liquidity because it made the new and old issue more liquid. They turned out to be a pretty ...


5

Here are a few reasons that build on @Dismalscience's answer. Capital requirements: Banks don't typically need to hold capital against loans they originated but subsequently moved into an SPV. This might be regulatory arbitrage but it might be a socially efficient outcome meant to move assets and liabilities out of the banking system. Market segmentation: ...


5

For any country that issues its own currency, having a sovereign debt in its own currency is a choice. It can always be monetised. This will cause a one-off inflation episode, but it does lessen, or entirely remove, the national debt. So for all countries with sovereign debt in currencies they themselves issue, then no amount of national debt is ...


4

Countries don't wage war, Governments do. GDP is the economic production of a country, which is usually much larger than what the government has as available annual income. Historically government expenditure in the US has amounted to ~20% of GDP since 1940 (and was lower than that previously). (Source) In general, if a government needs to spend more on a ...


4

Every country has a trade balance, which is defined as exports minus imports. The United States is a typical observing state, which means their imports are higher than their exports. I do not know the current numbers but USD 1m of imports and USD 600k might be right. In this sense you import USD 400k than you export. Now as you already pointed out you have ...


4

Usually, the debt/gdp ratio has no unit. For instance, if the debt is equal to 60% of the gdp, the debt/gdp ratio is 0.6. If you use real gdp as denominator and nominal debt as numerator, you end up with a number which is less clear to interpret. It is more relevant to have either both variables in nominal terms or both in real terms. In these two cases, the ...


4

It appears that the OP confuses money with property rights A) It writes "deposits owned by the bank" which is simply wrong, since deposits are liquid assets belonging to the persons that deposited them. The bank leases the funds from them and then sublets them to the debtors. B) Looking also at an OP's comment to another answer, indeed the bank may ...


4

There is a lot of controversy in economics about the advisability or otherwise of government taxation and deficits, but let's skip that and just look at the figures. The U.S. National debt held by the public, is approximately \$13.3 trillion. Federal tax revenue for 2014 was slightly over \$3 trillion - which still left a \$500 billion deficit. Interest ...


4

It's an analogy. The Saudi economy as an analogy for the Australian economy. Like any other analogy, you can stretch it to a certain point, but then it breaks. The article sets out the ways in which the analogy holds. Stretching it further will probably break it. Let's look at how the article says the analogy holds: both economies have a significant ...


4

If the loan is indexed to inflation, "nothing" would happen. The remaining loan payments would simply increase. If the loan is not indexed to inflation, when inflation occurs, the debtor's wage would most likely increase with the inflation rate. Hence, he would very quickly have the money (in nominal terms) required to pay back the debt (which is now less ...


4

SPVs are typically used in MBS issuance to get the loans off the issuing bank's balance sheet, freeing up that balance sheet space to make more loans and providing bankruptcy-remoteness (i.e., the SPV would continue to function even if the issuer went bankrupt) to investors. This is why a securitizing bank would transfer loans to an SPV. However, given ...


4

Try the magic of double entry bookkeeping to see that creating money does not immediately make a bank more valuable. Initially the loan is matched by a deposit, and this is creation of what is effectively money: Bank A has an asset: a newly created loan to customer B Bank A has a liability: B's newly created deposit with Bank A, which B can spend B then ...


4

The position is both worse and better than you describe If you look at Section 7 and Figure 6 of https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/balanceofpayments/quarter1jantomar2018 you will find that UK liabilities (public and private) abroad were estimated to be £10,894.5 billion at the end of March 2018, about 5.30 times UK ...


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