It seems that most if not all advanced economies (US, Japan, UK to name a few) have been running budget deficits since basically the last 20 years. I understand that current debts lose value over time because of inflation and economies grow, but how can they do this for basically ever? I can’t wrap my head around the maths that makes this possible, and the markets don’t seem all that worried
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They can’t. And they don’t.
If you look at actual historical examples, instead of listening to propaganda by mainstream economists, you’ll see that virtually no country managed to permanently bring the debt situation under control once it got too big, and that coupled with a few other factors caused the downfall of so many nations.
Debt and inflation are considered a big contributing factor to the fall of the Roman Empire for instance.
The system can cave in on itself any day with disastrous consequences, but the people in charge don’t care about that as long as it doesn’t happen on their watch. It’s a system that works very well short term, but bad in the long term. They’re just all banking on being a problem for your kids or grandkids, instead of now. They make their profit then bail before there’s trouble and leave us holding the bag.
We think of “government debt” like we think of personal debt – but the reality is that it’s more like stock in a company.
National debt isn’t like personal debt. It’s more like people betting on the future ongoing success of the country’s economy. The US national debt is mostly held by members of the public, in the form of Treasury bills (T-bills), T-notes, bonds, etc. People hold these as investments, because they reliably pay off: the US government has enough revenue growth (taxes raised from an expanding economy) to reliably make payments on this debt.
Governments can just print fiat money and pay for whatever they like (or they *could* if they didn’t follow their own self-imposed rules.)
However, printing lots of money with no regard to the strength of the economy is a one-way ticket to hyperinflation.
So, in order to be able to spend lots of money without just printing it, the government pulls out of the economy about as much money as it puts in. It does this in two forms: taxes and borrowing.
Taxes reduce the supply of money by directly taking a portion of the money used in economically valuable trades. People are going to do these trades anyway because the value of the trade is worth *more* to both sides than the amount of tax being paid. This is all good but too much tax (or an ineffective tax model) may prevent people from making otherwise good trades that would have had a net benefit for the economy.
Borrowing also reduces the supply of money by allowing people to commit to locking up their long-term wealth, ensuring that it doesn’t flood the market and cause inflation. In return, these people will be paid some interest, which is better for them than nothing. This allows the government to lower taxes and promote economic activity, but at the cost of servicing this debt over time. However, since most governments are actually targetting a low but non-zero level of inflation anyway, this cost ends up not mattering to them all that much if they only borrow an amount that they can afford to.
Of course, it’s also possible to borrow too much and end up in a situation where servicing your debt becomes too expensive. You end up needing to spend less, tax more, print more money, borrow more or default on your loans (and/or lie about how bad the situation really is.) Any of these options will devalue your currency and/or increase cost of borrowing, which only makes your financial situation worse and can ruin your economy for decades. This is more or less what happened to Greece in 2009.
However, if you borrow a sensible amount, your cost of borrowing remains low and it’s a very effective tool both for locking up money short-term so that you can spend a lot (on, hopefully, things that will strengthen your economy) and for building long-term confidence in your government.
Assuming there’s somebody who wants to loan the money, any entity can run up big deficits forever as long as it continues to grow.
It’s kind of like when you buy kids clothes that are too big for them, assuming they’ll grow into it. It only stops working when the kid stops growing.
I read somewhere on Reddit there are basically 4 types of categories for economies: low debt ratio, high debt ratio, Argentina and Japan. Argentina being singled out for being especially alarming and Japan for being special. I’m no expert but thought I would just share this little comment/opinion.
They can’t. Don’t believe all this MMT garbage; debt and deficits actually do matter. The reason they’re so common is because expectations were set based on higher fertility rates than currently exist in those countries so people want to keep growing the economy like before even though that’s impossible. The debt does end up having huge real world consequences though. Japan has the most of any country and hasn’t seen an economic growth in 30 years. China’s economy is is a huge downward spiral currently due to massive debt in the housing industry. The US hasn’t been hit YET, but it’s a certainty it will happen at some point in the future.
A lot of good answers here, but there’s also another factor. Government debt is money in itself (the market for US Treasuries is huge), and also backstops almost all other forms of money. Banks, for instance, are required to hold a certain amount of capital in government bonds, as collateral for their lending. So your credit card is backed by your bank, which is backed by the Federal Reserve, which is backed by US Treasury notes (and same in other countries).
A balanced budget has to have some reserve for contingencies. What could that reserve consist of? Can’t be goods, and there is only so much gold, and investments in the stock market are essentially debts owed by companies (which is fine unless the contingency is a general downturn), so you ‘invest’ by buying the debt of the largest, most stable thing around – the government. If the government does not issue debt the money supply dries up and bad things happen.
Because money is fake and they can just print more. Ever since most countries switched to Fiat currency money has been based solely on trust in the issuing government.
Countries with good credit scores can borrow for cheaper rates than individuals. Countries done die, go bankrupt (usually), disappear into the south American jungle etc. In the last 15 years if you take for an example the UK government, borrowing money was as close to free as makes no difference. Any return at all above the interest rate borrowed at makes the debt valuable to that country. Where a country borrows money for capital spending – govt salaries, food or power imports, that’s a much more worrying sign. These don’t necessarily create a return compared to building useful infrastructure, investing in education or industry which will help generate a trade surplus.
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