For example, the US and Canada have yearly deficits in the billions. Technically, doesn’t this mean the country is isolvent?
How often are countries in the surplus? What would they do with the extra funds/savings?
In: Economics
When a person is bankrupt, it is because they are unable to pay their outstanding debt obligations. The USA (and other countries in a similar position) won’t “go bankrupt” unless and until we default on our debts. A country going bankrupt is called a “sovereign default.”
The simple answer to the question is that as long as people are willing to lend the government money, it won’t run out of money, even by running deficits.
That obviously raises a follow-on point: why do investors still lend the government money if it doesn’t balance its budget? Won’t it run out *eventually* when the bills pile up too high?
There are a couple important reasons why that isn’t an immediate problem. First, if our economic growth is high enough, then even if we aren’t balancing the budget each year the increasing debt load won’t get high enough to force the country into default. This is because the amount of money the government takes in through taxes can go up when the economy grows. If we grow the economy fast enough to keep up with the growing debt load, we can keep making payments.
Second, many countries — and the US definitely falls into this bucket — are large enough, stable enough, and reliable enough that investors are happy to loan them money *in our own currency*. In extremis, a government that ran into severe fiscal trouble could just print extra money to pay its debts with. This would have huge economic consequences, like hyperinflation, but a desperate country might decide it would be worth it.
Obviously neither of these points means running large deficits is automatically a *good* idea. If the budget was balanced, the money could be directed toward anything that Congress or another country’s government wanted it to go to. It could fund more government programs, or it could go towards paying down the existing debt. Or, there could be tax cuts to bring revenue down to actual spending level.
Because their GDP increases; it is unsustainable when debt grows faster than GDP. If you make $60,000/year a $200,000 house is a reasonable amount of debt to have. If your income doubled to $120,000 you could afford 2x the house. The US hasn’t been in a surplus since Bill Clinton was in office.
Because they keep paying off old debt and issuing new debt. and new investors line up to buy the new debt. As long as they can manage the interest on the debt and the other operating expenses, or have ways to increase revenue (eg. Raise taxes) the government can manage.
Because the US and Canada are the issuers of their own currency. They just change the numbers around to whatever accounts they want. That’s literally how the Fed works in the US, as told by the Fed chairs themselves.
Lets say I make 10k a year, but I want to spend 12k. I borrow 2k, with the expectation that I pay back 3k next year.
Now I still want to spend 13k next year, plus I need this extra 3k, so 15k total. But you see, I spent that 12k bribing on self improvement courses, and i got a promotion, so i now earn 12k. I borrow 4k, so next year i pay back 6k. More self improvement, another promotion, I know earn 15k, spend 14k on myself, need to borrow 5k…
So long as I keep getting promotions, I’ll always be able to pay. In fact it might be worth me staying in debt because it means i can invest more in self improvement and ultimately afford a higher quality of life, even with interest payments, than i would if i tried to minimise my expenditure to get out of debt.
Self improvement courses are investments in the economy, promotions are economic growth, and income is taxes.
It works more reliably for economies than people. And because countries can be very reliable in making payments, and have a LOT of assets, they can borrow with very low interest rates.
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