How do countrys get in so much debt and why do they keep expanding on ther debt?
In: 9
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.
Latest Answers