How can an economy be bases on debt , such as the US, and how does it work?!
In: Economics
By investing the money today in the countries future economic growth.
Say there are two cities either side of a big river.
The government thinks – “hey, if there was a bridge between these cities, then goods and services could move more easily and improve the economy, which we can then tax”
The engineers say building a bridge will cost $1 billion.
“Dang” say the government. “We don’t have $1 billion lying around. It will be years before we save up enough tax dollars”
“But wait!” say the bankers. “We’ll give you $1 billion today and you can pay us back later + interest.”
So the government take the loan, build the bridge and the additional revenue from the improved economy more than covers the interest on the loan they took out to build it.
Even though many countries are in debt, the creditors know they’re good for it. They can even sell the debt on to other people, so it gets traded around.
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