Hi! I was looking up the statistics about the national debt of my country and the negative implications thereof. I assumed it must be owed to other countries. Pertinently, every major economy I came across has a very high national debt, including the developed countries. Who is this national debt owed to? If it’s owed to each other, why is that a major problem? If it’s owed to the citizens of it’s own country, why is that a major problem?
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Governments issue debt in the form of bonds, a promissory note which will pay out more money in the future than the cost to purchase it. It is, for all intents and purposes, a loan, lent by the purchaser of the bond to the government. So, whomever holds the bond is the person to whom the debt is owed.
>If it’s owed to each other, why is that a major problem? If it’s owed to the citizens of it’s own country, why is that a major problem?
Well, it *depends*. What it depends on is is whether the service on the debt will grow at the same rate as the government’s tax receipts. You may notice that the economy tends to fluctuate. We have boom years where everyone is very hopeful, and spends money freely. In those times, incomes are up, and tax receipts are also up. However, for every good year, you’ll get a bad year, when the market starts to get skeptical that all the exuberance is unwarranted, spending shrinks, jobs are lost, and government revenues fall.
So, because most governments have programs which are intended to exert a moderating force against this business cycle of boom and bust, that means when times are good, the government should run surpluses, and when times are bad, they should run deficits. This, however, is where things get problematic, because governments almost *never* want to run surpluses. Instead, they will cut taxes, which winds up heating up the economy, and *exacerbating* the business cycle.
So, when the business cycle turns bad, there are no government reserves to draw upon, and the state must issue *more debt*. So, the question becomes, will there come a point at which the investors who buy government bonds no longer believe that the state has the facility to pay back the money they owe.
I should be clear, it’s not that the money wont necessarily be paid back, it’s that they’ll *print money*, and they pay back their debts with inflated currency that is, in fact, worth less than what you expected. You know, like what’s happening right now.
So long as government debt is issued in your government’s fiat currency, high deficits will result in inflation, as the state prints money to meet their “obligations”, which means that the bondholders will take a bath, along with anyone unfortunate enough to be unable to command a raise when inflation rips through the economy and gives everyone a pay cut.
Some countries, however, have currencies so unreliable and weak that nobody will buy bonds denominated in it. So, they’re obliged to borrow money which must be paid back in a currency they can’t print. Short term this might work, but if revenues can’t be raised, they can swiftly find themselves in economic collapse, as the government can’t pay back their debts, or inflate their currency. Look no further than Lebanon or Sri Lanka for an example of this right now.
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