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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I’ll go with the ELI5 here, unlike some of the answers I’ve seen…
When you see billionaires, they never have these billions as cash in a vault. They own assets of various kinds. And they often have debt. But that’s not a problem, as their net worth is the only relevant measurement. If I own land worth a billion and I have a loan worth 100 million, I have a net worth of 900 million.
Now let’s look at a state. It controls huge lands under its jurisdiction. Some of the land it owns, some it doesn’t but it still has the right to tax it. It has an ever growing economy, today it has i e doctor and tomorrow it has two, there growth in the medical sector. It has a growing population, all of whom are potential tax payers. All these are assets in the imaginary balance sheet.
So as long as all this grows on one side, the debt can grow on the other side of this balance sheet. And during long periods of time, the debt can grow quicker than the “assets” grow. That road stretching across the nation might cost money, but having goods and services move quicker makes up for it in the long run.
And because a state in an advanced economy pays its debts, buying its bonds is the safest thing you can do. As long as you believe the state will exist in the future, that is. And when you’re the US, the strongest military force in the world, with natural resources, and a robust legal system, your bonds are very much sought after.
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