Eli5: How can some country have trillions of dollar in debt like Japan but still functional without any consequences?
In: 101
Modern Monetary Theory (MMT, aka the model that countries usually use and say they don’t) says you have 2 buckets:
[Government Money] and [Private Money]
The way the private economy gets along depends on having enough money in circulation to satisfy demand without overrunning demand. We never want too much money chasing too few goods.
[Private Money] is added to by Government Spending, subtracted from by taxes.
[Government Money] is added to by taxes and, subtracted by debts and Government Spending.
Did you catch that? Where do debts go? That’s right, into the [Private Money] bucket.
Government debt is economic stimulus. A Government bond is basically the same as a piece of currency, except it provides interest.
So, debt is normal, it means the government is doing things to keep the economy running.
Now, if your government also *issues currency*, like Japan does, then ultimately, the money in its bucket doesn’t really matter. It can increase or decrease spending, and debts, raise and lower taxes, and there’s no balance sheet that has to be maintained on the [Government Money] bucket.
The government does have to ask the private economy to do things that it *actually is capable of doing*, though, otherwise, you get too much money chasing too few products. Again, that’s bad.
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