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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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.
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