How do countrys get in so much debt and why do they keep expanding on ther debt?
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It’s better for people to have low and steady inflation but this needs more currency to be in circulation.
The government then creates money by spending it into existence and removes (taxes) less than it spent.
The difference is the deficit and it’s the extra money left for the private sector (i.e. me and you).
If they can get loans at low interest rates, it’s actually good policy to borrow IF they invest it in infrastructure and other projects that will pay off in the long run. Unfortunately they often invest it unwisely, there’s little or no return on the investment, and when a financial crisis hits they may be forced to make severe budget cuts in order to get bailed out by the World Bank or richer countries that don’t want to see them completely fall apart. Being in debt to richer countries can also make them beholden to those countries politically, whether they like it or not.
It is easier to get money to get re-elected (bribes/donations) if you spend money on companies. So you buy military gear and give huge tax cuts and build interstate roads. But then, you need to get elected again, so you repeat. Eventually, you start spending more and more on this that are not really trackable like military and tax cuts and you can’t cover the cost of running the government, but you get re-elected. So you borrow and just keep repeating. You pocket the bribes. You don’t care if the country is broke because you are rich.
For anyone interested about this question I would direct you to play Victoria 3. It answers your question quite well.
If you look at a country having a treasury (which they can gather their surplus money) and a maximum viable loan size before they would be forced to default. An important metric to a country is the GDP of said country. It shows you how large the market of a country is. Consequently it shows how strong the economy of a country if you relate it to how big the loans of said country are.
A country should want to increase its GDP as much as possible. They can take quite a few policies or even direct action (like building infrastructure or founding state run companies) to increase it. In this situation money sitting in the treasury is money not spent in increasing GDP. Except emergency situations and some specific reasons a government would strive to have an as little as possible surplus in their treasury. They will even go a step further and even borrow money to grow their GDP faster. As long as their GDP increase outpaces loan interest then they would be increasing their GDP quite fast with little to no adverse effects. Now that is under ideal conditions. Reality is a bitch and won’t let things go your way. This makes such economic expansion quite risky and the source of the woes of many countries these days.
A good advice would be to every few years or decades clear out your debt so your market can actually stabilize. If your market is constantly expanding , it is quite hard to notice and solve problems that might be plaguing it. A good example would be the housing market bubble in China.
Because money is made up. It isn’t real debt, as it will never be paid back.
The other answers are correct. Money comes into existence because governments decide that it should. Likewise, the debt is ignored because it keeps the game going.
99% of the time, it works. But it breaks down in times of crisis. Hence why we’re experiencing economic turmoil.
There’s two big reasons.
First, the government wants to do stuff. Infrastructure projects, military spending, education. Whatever it might be. It costs money. Lets say for an example they bring in $100 billion a year, that’s not accurate but it makes math easier. If they want to do a $500 billion project, that means they have to save up for 5 years to do that project. Or they could take out a loan, and do it now. If it’s something like an infrastructure project that makes commerce more viable, it might have a return, where completing the project increases tax revenue.
And the other important thing, is that it allows the government to be doing multiple things at once. If the repayment on the loan is like 5% a year, then on that $500 billion loan the government only spends 25 billion per year over the course of the loan, which means they could have $2 trillion worth of projects going on at a time. If these projects increase tax revenue, like education or infrastructure, then it’s probably worth starting now rather than waiting.
Also, while debt certainly needs to be managed, the purpose of a government is not to make money. If a business goes bankrupt the business has failed. If a government is in debt, that doesn’t *necessarily* mean it has failed. Debt is not a failure condition for a government, like it is for a person or a business. As long as they can continue to make the minimum payment the government debt is fine.
The second reason, is whoever the debt is owed to is very interested in keeping the current regime in power. So it’s a geopolitical move to be in debt to other countries. China owning 4% of federal debt sounds really bad, until you think about it. Because now there’s a trillion reasons for China to maintain good relations with the USA. Because if diplomatic relations break down, you better believe we’re not gonna pay back that debt.
It’s actually a little concerning to learn then, that the debt owned by China is the lowest it’s been since 2004. They’re not buying any more American debt. Which means they’re preparing, economically, for worsening relations.
But this applies domestically too, like if investment firms buy treasury bonds, they’re not going to be interested in supporting any revolutionary factions, because then they would lose that investment.
Hope this makes sense!
**TL,DR**: Money now is better than money later, so the government takes out loans instead of waiting for taxes. And it’s also good for stability to owe other groups, because now they want to keep you around so they get their money back.
It is very easy for countries to borrow money these days, compared to businesses or especially private individuals. There is a lot of political pressure on countries to go into debt, since the population wants low taxes, but lots of spending (on things like schools, health, police, roads, subsidies, grants, etc.). Unlike private individuals, countries don’t have to get approval from a bank to get a loan, they are able to sell various types of government secured products on the global markets, and there are many buyers interested in such products.
If a country is in too much debt, it needs to take severe action to pay off the debt back to a reasonable level. This generally means policies that will be unpopular with the population, such as higher taxes and less spending on popular programs. Politicians who try to do the responsible thing tend to get voted out of office by people angered by tax hikes and spending cuts.
It’s simply what capitalism demands. Need to keep printing money to line the pockets of the all the corporate vampires.
On a smaller theoretical scale you could take a loan for 500k, buy a house for 400k, compartmentalise it into 4 smaller studios with the remainder and rent each studio for 1.2k bringing you in 4.8k before any taxes and landlord duties etc, let’s just say net 3.69k a month while the loan repayments are only 2k a month spread over 20 years, ultimately netting you profit.
Scale this up to governments who will borrow the money to reinvest in what the comments around here are saying, lol.
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