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
The government can always borrow more money from itself. It’s all an elaborate song and dance to confuse the public and to (usually) keep from printing money too fast.
Hmm economy is like a business. You can run your business at a loss as long someone is willing to continue investing in you.
Government Debt increases the money supply, and because of this is inflationary. Because of the inflation, they are paying back these long term debts 30 years later with money thats worth substantially less than it was worth when it was borrowed.
They can get away with it for the most part, as long as they keep the amount borrowed below a certain percentage of the economy. It works as long as there is someone willing to loan them the money.
However there eventually comes a point where that no longer works, and the Treasury cheats by simply printing more money. You see the resultts in places like Pre-War Germany, Venezuala, and Zimbabwe, where at the end they were printing multi-trillion dollar notes. A wheelbarrow full of them wouldn’t buy a loaf of bread.
They can’t that’s why crucial things like housing and education is getting increasingly expensive while the wealth gap increases. The entire system almost collapaed in 2008, the entire thing is one big experiment. You inherently understand that it doesn’t make sense, we are pulling from the future to pay for the present. Don’t let anyone try to tell you differently they are trying to gaslight you
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.
>but how can they do this for basically ever?
1) They can pay off the interest, ( 7.6% of the all US spending, 28.3% for Japan). You could get a $100 loan every year for the next 50 years. You can affords the $5 loan. For every dollar a US tax payer pays, 7 cents goes towards paying off past debt.
2) Governments don’t age and die. They can keep working forever. There is no retirement they have to plan out and can be in debt forever… if they really have to.
3) As long as the economy grows, going deeper into debt isn’t a big deal. It’s the debt-to-GDP ratio. …..Which has also been going up.
4) They can’t. No trend will continue forever. Earth has a limited carrying capacity and we’re well over it. Eternal growth is not possible. Not without reaching out to the stars, but that seems unlikely any time soon. What IS soon is the coming realization that all sorts of economics change when the population isn’t growing. The world just hit that inflection point. The US is going to be okay as we artificially keep it going with immigration.
Deficits matter, but as long as they’re small compared to how wealthy we are, it’s not a huge issue.
Economics Explained on YouTube did a great video about this recently. I’d recommend checking that out. I think it was ‘What everybody gets wrong about global debt’.
[deleted]
The answer is mostly “we don’t know”.
The US can do it because they are the world’s reserve currency, which means that for now they can always just print more money without consequence. That could change.
Other countries can also print more money, but their money could become worthless. Will ever increasing debt work? Maybe, maybe not. For some countries the currency has spiralled into hyperinflation where the money they print becomes worthless. Most countries have not had that happen.
Hyperinflation could be a rare or inevitable result of deficit spending. We simply do not know.
99% of the comments are far away from ELI5. More like ELI25-and-finished-econom-highschool.
Latest Answers