So apparently pretty much every country in the world has a national debt that is ever increasing. Different elected governments try to enact savings to stall the debt growth with varying degrees of success, yet always the debt grows. Often I hear it said “we cannot afford these social changes, the national debt increase is not sustainable” etc.
So please, if you can to me how national debt works and what is too much?
In: Economics
The country needs to be able to pay the interest on the debt. This is usually done by raising the taxes. When the taxes is too high the economy may collapse from this and you will be unable to pay the interest or even pay back the bonds when they are due. When there is a risk of this the banks that loan money to the government do not want to be the ones holding these debts when it happens. So they want to loan money to others instead. This means the government can not find people to loan them money so they will be unable to pay back the loans they already have. To prevent this the government will raise the interest rate making the banks more willing to loan money to them. However that means that the interest is higher so the taxes have to be higher to pay the interest.
This is kind of the issue here. A government defaulting on its debt is usually not triggered by there not being any money, but rather that the market fears that the country will default. So it becomes a self fulfilling prophecy. It can be very hard to predict when this will happen as it is based a lot of psychology of the analysts who tell the banks about their risks. One of the best indicators we have had is the debt to GDP ratio. The GDP of a country indicates how big the economy is and therefore how much tax the government can collect. A previous rule of thumb is that a country will default if the debt is higher then the GDP. And although no country have had so much debt before they all have crashed when it have been predicted that the debt gets that high. So it have been considered a fairly reliable indicator.
I am saying this in past tense though because the US debt passed the GDP without any indication from the market of any problem. And the debt continues to grow without any signs of slowing down. So there are apparently some exceptions to this rule, we just do not know exactly what this is.
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