The USA and Chin have the highest debt in the world but i don’t understand the concept of them being some of the wealthiest countries, does that debt need paying off? How do they get this debt? Ultimately it just doesn’t make sense to me.
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Debt in a country isn’t like a house.
Firstly, as a person, your income is fixed based on what you do.
Secondly, your expenses are separate from your income; one does not affect the other
Thirdly, there is a maximum you can borrow its hard limits from institutions that say nope! No more, and then you’re shit out of luck
Fourthly, you die or lose the ability to earn money.
Finally, if you owe money, the bank can collect on you; it has the state to back it up with courts, police, etc
None of these are valid if you are a country.
This means the standard rules do not apply to a country.
So, a country’s income is ultimately based on its taxation and investment returns, but it can also print currency if it really needs it. The first is based on the number of transactions that take place and the velocity of money. The more times money changes hands, the more taxation. Investment increases if the government has a stable country, increasing revenue again, but the investment also creates jobs, etc., which creates more taxation points. Suppliers, for example, have to pay tax on the profits they make selling to the country. So your income goes up as investment goes up.
Expenditure in government terms is small, but to the economy, they are the most significant single buyer of everything. If a country cuts back on expenditure, it means less money in the hands of people with low incomes, so grocery stores go bankrupt, and it means fewer bridges, which means more construction goes under. Those lost jobs go on welfare, and government expenditure increases, not decreases, EVEN though you cut back on spending!!
Because of this, debt doesn’t work like a person. A country can borrow over centuries and issue debt like ‘perpetual’ bonds, which pay the owner forever. As such, a country has no actual limit on what it can borrow, and when it does, it could just punt to the future. But if its income increases enough the debt becomes orrelvant to the country, take the UK government its still Payong off the Napoleonic war bonds but it a Pittence to what it once was.
The limit is thus the confidence that the country’s current budget will be able to meet current interest repayments and still have enough to keep investment and spending at sensible levels. If the market believes that investment and current spending are at risk, people will stop lending. But they can never actually collect on what they’ve lent as they don’t have an army or police to do it.
We tend to use indicators like debt to GDP as a guide for this confidence, but there is no real metric; it’s an ethereal thing that a country’s credit is good because we all believe it is good. As such, big countries are better than little ones, so they can borrow more because we believe bigger is better for various technical reasons.
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