eli5 Why are all states in so much debt?

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Now in theory I should already know this, since I am a teacher for politics, but I have never been really able to wrap my head around it.
I understand that high debts of a state are not that much of a problem as long as it is not too high in comparison to the gross state product.

I still struggle to understand how it has come to this situation. Pretty much every state has to pay massive amounts just to pay the interests on their debts.
Now if only a few states had this problem, I could understand it. But it’s literally every state. I of course understand that sometimes in a time of crisis there is need for deficit spending. However I fail to understand how this is really sustainable. Isn’t there a possibility to just make a cut and start anew without debts somehow? I assume we would end up in the same situation as before a few decades later, but why is this system only working with massive debts? This seems like a giant flaw to me. From what I gathered this is basically WAD, but how?

Thanks in advance.

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3 Answers

Anonymous 0 Comments

Debt itself is not the problem if you assume growth lies ahead. (Which is the foundation of our current economic system) States don’t spend like you and I, they are not consuming in the same vein and they are more like a business in that sense.
If you operate a business that makes x a year and it would take you 10 years to save up enough money to buy new machines that double your output, you will probably have less money in twenty years than if you bought the same machines with debt and paid back the interest with the increased output for the first 10 years.
Governments are similar, you could have infrastructure that is entirely within budget or you could have better infrastructure that increases productivity more than the interest is.

In addition Governments are very big and a lot more stable than companies. You wouldn’t bet on Apple being less likely to crumble to dust in the next 20 years than the US Government for example. So buying US debt, essentially lending money to the US, is seen as a very safe investment, which is worth a lot if you know about investments.

Anonymous 0 Comments

I think it’s basically because states don’t die of natural death. I suppose we could reach the same situation for humans when we cure cancer, old age, and we can restore a backup of our minds to a clone in case of accident, making us virtually immortal.

If you lend money to an immortal, no matter how much you lend, you are in no hurry of getting it back. That money is invested, it gets you a nice little percentage every year, it’s still *your* money, just in someone else’s pocket.

But when you lend to a mortal, you absolutely need to get it back before they die, or you might very well lose it.

That’s why mortal must, not only pay interest, but also refund bit by bit. And states can just pay the interest. In fact, they can borrow even more. For investors, that’s the equivalent of putting money on a very long term storage account. While the countries are under no pressure to refund, individual investors in need of cash can always sell the state’s debt to another investor for it’s actual value.

That’s the perspective of investors anyway.

The perspective of states is much easier to grasp:

“Wait… I can spend more money than I earn, and I don’t have to pay it back? Just a small interest? What’s the catch?” And there’s no catch. Do the math for yourself. You want a PS5 but you don’t have the cash right now. The bank will lend you the money no questions asked. You don’t need to pay it back. But you’ll need to pay a small percentage interest. It’s basically like renting the PS5, but for like 2€ a year.

Anonymous 0 Comments

Do not forget the perspective of the creditors. For them a state is (often) a very reliable entity. They do not disappear easily and most countries would like to keep their credit ratings on an attractive level (barring massive economic shocks, wars or fantastical political programmes), or they’ll face punishing market rates. States can ultimately print legal tender and usually have a lender of last resort in the form of a central bank. Companies and other investment opportunities usually don’t have these advantages, or at least not on that scale. So even a highly indebted country can remain an attractive debtor.

>Pretty much every state has to pay massive amounts just to pay the interests on their debts.

Only the percentages matter. A small percentage of a massive amount of debt is just another long number. It also matters to whom this debt is owed. If it is owed to the citizens of the country or an important trade partner they will also be invested in the future economic well-being of the state in different ways.

>Isn’t there a possibility to just make a cut and start anew without debts somehow?

Yes, that would be a sovereign default. That can have some nasty consequences though, especially for the financial reputation of the country.