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
In: 316
If the compounding value of the debt does not outgrow inflation, their real debt is actually depreciating annually.
Say you make 100 tokens a year, and your tax base grows at 2 tokens a year. You take out new loans each year, 100 tokens, but at 1% interest.
Year 1, your debt is 100% of your tax base. Your interest payments are 1 token. Easily covered by 1 of your 100 tokens. You have 99 tokens left over.
Year 2, you pick up another loan. Your debt is 200/102 ~~> 196% of your tax base. Your interest payment is 2 of your 102. You have 100 tokens left over.
Year 3, you pick up another loan. Your debt is 300/104 ~~> 288% of your tax base. Your interest payment is 3 tokens of your 104. You have 101 tokens left over.
You can see what’s happening. Investors are getting their promised returned. The amount of left over money keeps increasing. The debt to Tax ratio goes up, but it doesn’t matter.
Latest Answers