how can a country be in debt?
In: Economics
So you loan 1 dollar get 1.016 dollars in return? Who does that apart from people with billions? In theory that’s a terrible investment.
Why would anyone invest in a return so low?
The country borrows the money.
For example, investors compete to loan the US money, because it’s very desirable to loan money to the US government. This is because the US has a huge economy, so it can pay you back when other folks can’t. Investors bid for the right to loan the US money, by offering lower interest rates than their competitors. In a recent auction, 2 year treasuries sold for 0.16%, a record low. Until Early this year, rates below 1% were not allowed, but the demand drove the US government to change the bidding system to allow even smaller numbers.
Most developed countries are in debt to their own citizens. Invest in treasury bonds, gilt-edge stocks or whatever they are called in your country and you are lending the government money. You might not do it directly, but most pension funds and other investments have a certain proportion of their funds in those safe but lower yielding investments to provide a certain level of security to back up the more risky share-based portion.
On top of that you have government to government lending and investment with foreign banks.
The country sells bonds and people buy them.
The country can decide that it is better to have the money now in exchange for the obligation to pay off the bond on its maturity date. If the extra money they get from the sale of bonds is put to good use then the resulting economic expansion can partially offset the interest that they pay on the bonds.
If you spend more money than you generate, you’re in debt. If you owe money, you’re in debt. If you’re in debt and don’t pay it, you also pay interest, which accumulates, as does the principal (debt owned on which you’re paying interest). This is as true of nations/states as it is for you and me.
Same way anybody can be in debt… they spend more than they make, in the case of a country that means spending more than they take in with tax revenue and other fees.
To fund additional spending, countries borrow money by selling bonds that pay back the principal plus interest at a future date. Those outstanding bonds are their debt.
They are in debt to themselves, to their citizens, other governments or business and foreigners.
Debt, in general, works the same for a country as it does for an individual. If you want a loan, it depends on how risky it is if you can get one and what it costs.
The details for a country are very different as a nation can print more money (which has a cost as well) and has the fun attribute of theoretically existing forever. A person who takes out a loan needs to pay it back in a relatively short time period. Wars from over a hundred years ago are still being paid off today by multiple nations.
This is very general, the details can and do get very complex. Nation state debt isn’t inherently bad, which is something way too many think.
What’s debt?
Debt is when you ask a friend for $5 and you say “I’ll pay you back later”. Now you’re in debt.
Debt is when the government asks a bank for $5000000000 and it says “I’ll pay you back later”. Now the country is in debt. (Not just the government, because the debt is still there after the election)
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