On Twitter I saw some post about universal income, some mentions that would add even more debts to countries (but that’s not the point of this) and some answers that countries, well their central banks actually, can just say “nope” to any kind of debts applied to them.
Is it technically true? And if so, what are the reasons it’s not applied, diplomatic, economic, capitalist unwritten rule?
In: Economics
The problem with this thinking is that it is one sided. The premise is that “government debt is BAD and EVIL and must be eradicated”. This is generally naive. Transactions involve at least 2 parties – the borrower and the lender. Do you assume that “ALL lenders are EVIL and should simply be stiffed.”?
The lenders can be investors, financial institution, pension firms, insurance companies, normal companies etc. So here are some easily understood reasons why simply “cancelling” debt is a very bad idea:
1) Insurance companies collect premiums and hold a sum of money to pay off claims. These holdings are usually invested and a significant part will be government debt (ie they lend to the government). So now these insurance companies cannot pay claims (since their assets just “evaporated”). The person who is in hospital cannot pay the hospital. Now the hospital denies treatment or is out of their payment. Now what? Hospital and insurance company goes bankrupt?
2) Depositors hold their savings in banks. Banks reinvest some of this in debt because they need to hold these deposits in “safe” assets like government debt. Now this debt is cancelled. Depositors lose their funds. Now the government has to print money to reimburse the deposits or the entire financial system and economy goes into chaos. Why do this? The government can just as simply print money and pay off the debt rather than cancel the debt. This has far fewer economic consequences in the short term.
Economies are complex things that don’t lend itself to slogans and naive actions. The most important thing for government is to maintain confidence and stability. The debt isn’t as important as maintaining productivity and social order. The idea of unilaterally cancelling debt is like burning down your house to destroy a termite infestation.
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