Why are most countries in debt, who do they owe, and what are the consequences? Why do they go into debt in the first place?
In: Economics
This is a very complicated question, but essentially governments borrow money for the same reasons that individuals and companies do- to get money up front for things that would take a long time to save for. As for who they are borrowing from, it depends, but usually it is from a national bank that exists solely for this purpose. In the US, this is The Federal Reserve (aka The Fed), which loans the US federal government money and controls the interest rate that it pays. It then sells this debt as bonds, which are traded by other countries’ federal reserves, private banks, and individual investors who buy them because they’re a steady and stable investment.
Because national banks control the interest rate for their country’s debt, they have a great deal of control on the country’s economy. Other banks essentially treat their country’s national interest rate as a bare minimum since they could just buy bonds instead with that rate of return and much less risk. Higher interest rates means it’s harder for everyone to borrow money to do things like start new businesses and expand existing ones, so it causes the economy to slow down. Meanwhile raising interest rates causes the economy to speed up, but too low of interest can cause inflation as things start costing more because it’s so easy to borrow money to pay for them (for businesses).
Consequences of not paying are pretty bad. If bonds aren’t paid out on time, everyone who owns them will start trying to get rid of them, tanking the price, she nobody will want to buy them in the future which means interest rates will hand to be higher to pay for better returns to attract more buyers. This of course makes things worse, since the county was already unable to pay lower interest debt. Think of it like an individual not paying their credit card bills and their credit score getting tanked. It’s basically the same thing.
Latest Answers