How do governments manage massive amounts of debt without going bankrupt or running out of money?
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So people often think of government debt as being a sort of “I borrowed $500 from my friend to make rent this month” kind of situation, but it’s very different.
Most government debt is in the form of bonds (or similar notes). These are notes that say “Buy me for $100 today, and cash me in for $130 in 10 years.” When someone buys one, the government is now $30 deeper in debt: they added $100 to their wallet while putting a $130 IOU on their books. But they have 10 years in which they can use that money.
So say they raise $2 billion from selling bonds, creating $600 million of debt. They spend part of that $2B on a program to eradicate pests nationwide, part on treating and preventing disabling illnesses, and part on building public schools. As a result, after 10 years, crop yields have gone up, workers have remained productive and healthy longer, and better-educated citizens have driven up wages and productivity. All of that means higher tax income for the government, long-term — maybe it’ll raise an extra $600M over what it would’ve been by the 10-year point, but it’s okay if it takes longer. In the long run, it pays off.
It would be analogous to an individual taking out student loans. Imagine going to university/college only for people to tell you “You put yourself in $60,000 of debt and you don’t even have a job while you’re doing it, that’s irresponsible.” But you know it’ll pay off eventually. But with the government, it’s not just going to school to get one or two degrees. Opportunities arise every day of every year, endlessly. For a government, anything that significantly raises the productivity of the country overall is an investment that eventually pays off, and there are so many opportunities for that sort of investment, including many that are only really available to a government. To a government, an investment that takes 75 years to pay off can still be totally worthwhile, and paying to teach some random toddler to read can be worthwhile. If you see lots of opportunities you’re highly confident about about, and you can borrow money in large amounts with relatively little interest, why *wouldn’t* you borrow money to invest? And so the debt keeps growing for as long as people are willing to lend more and more money (buy more and more bonds). People are willing to buy more and more bonds because you consistently pay them back. If you frequently ask me “lend me $10 and I’ll give you $11 tomorrow”, and you keep your word every single time, day after day for 140 years, well then yeah, of course I’m gonna agree every time you ask. And you don’t eventually run out of money because, when it comes time to pay me back, you’ve always found a way to turn $10 into $12.
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