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
Government get most of their money from taxes but sometimes they need either spend money they haven’t gotten yet or spend more then they’re going to make. And because printing money is actually a really bad idea they borrow money.
The way they borrow money is by selling bonds, which is an IOU saying that the government will pay you back with interest if you buy it. Most bonds in the US are owned by the American people, usually in retirement accounts, or owned by the Social Security Administration.
There really aren’t consequences most of the time. It’s totally normal, and sometimes really good, to borrow money to help keep money flowing. It can become a problem if to much is borrowed but you can borrow a lot before it gets to that point.
Countries are in debt because their citizens like government services more than they like paying the taxes that fund them.The government sells bonds to investors, who want to hedge the risk of investing in companies. The consequences are that investors get more safety and citizens get more services. Alas, when interest rates go up, the government can’t afford as many services, without exploding the debt. It’s only bad when the government does that and lets inflation run wild.
Most countries debt is in other countries, or in ways that help to increase GDP. Kind of like how you can buy a house flat out, or you can mortgage one earlier and hope the benefit makes you more money than you’re paying in interest.
Most countries get into debt to pay for stuff like roads, schools, and health care. They owe money to banks, other countries, or investors who buy their bonds. Consequences can include higher taxes or less money for important things.
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.
Self development within your own means is very difficult. Either a country owns some immensely valuable natural resource (and can defend it), steals/appropriates wealth from others (empires), or borrows (most modern economies).
Say you start with a country that has a lot of farmers using hand tools and buffaloes to work the land and transport stuff. Clearly that country can become much more productive if it built proper roads, obtained machinery and upskilled their farmers. But expecting the farmers to become more productive or save enough to purchase these items is likely impossible. So a reasonable and “good” government borrows money to build these things and hope that the additional productive output from the citizens in the future allows them to tax enough to pay back these loans.
Governments borrow from banks and other citizens mostly. Occasionally, governments borrow from other governments although that is rare. Governments borrow by issuing bonds (essentially give the government money to obtain a promise of repayment in the future). Bonds are generally sold to anyone.
Like any borrowing, there are good reasons to and bad reasons to. There are very productive reasons to borrow and very unproductive reasons to borrow. Consequences depend on how well the money is spent. Not all debt is bad – in fact, one could argue that most debt is good since the global economy has grown significantly in the last 100+ years.
Nearly every country has electricity, mobile phones, can access the internet, transportation and reasonable housing, education and also some healthcare. Wealthier countries all have degrees of social welfare and healthcare for the elderly and free education. None of these are “free” – they all take resources and, most of the time, governments provide these resources ahead of when their citizens have actually earned them. Governments build schools today and hire teachers so that the children of today can become better skilled and earn more in the future.
Almost all countries are in debt. Actually I think all are. But it’s mostly through a central bank that works within bonds.
Who you vote for is so important because they are responsible for the distribution of public funds and investment.
Government money should be used to grow and develop public infrastructure, and effectively make a system that benefits the everyday worker to get back from the taxes they pay.
A simple understanding of government spending is that you are paying for what you use and what you need, so who you vote for should align with your priorities in order to make your tax contribution worthwhile and your access to resources or services worthwhile for you and your community.
Borrowing money from other countries is not the first choice to economic growth. And if a leader borrows money from another country for the wrong reason or in a situation of reaction to economic crisis it can be used as leverage and put one country in the pocket of another. So be careful who you choose to manage your funds.
The government of today wants to spend more than they collect in taxes, they must borrow money to cover for the shortfall.
The debt is basically borrowing from future self ( governments of the future and the people they represent).
This debt is a burden on those future governments because now they do not have the headroom to borrow as much or spend as much.
On top of not being able to spend on their people, now the future governments have to spend on paying that interest on these loans.
So, when borrowing, from the future, we must ask ourselves: what are we giving them back for this money?
If you take these debts to do things that also help the future ( large infra, dams, power grid, education, sustainability…), then they would not mind.
But if this is instead used to spend on short-lived benefits and only to help current population or buy goodwill ( benefits to seniors, spending on military, unsustainable industrialization, roads, tax breaks, giveaways,…), then this debt is bad and is basically a stolen opportunity from our future.
Some healthy amount of debt is considered okay, although economists keep debating how much exactly. That value is usually referred as a percentage of GDP. I am not an expert on this but if debt servicing is among your top-10 expenses, you are in trouble.
There is an old saying about debt.
“ If you owe the bank $5 million and you’re unable to pay it back, you are in trouble. …If you owe the bank $500 million and you can’t pay it back, your bank is in trouble “
There is a self-preservation aspect to national debts. Governments with large debts create a web of vested interest across many other governments and global financial systems to make sure those debt payments continue to be made.
You don’t get paid every hour or every day that toy work, there is a lag between when you create immediate value as an employee until you realize that value in cash from a paycheck. Now amplify that out to a city, a state, a country. The deficit is not = to you owing your neighbor for fixing your fence. It’s many scales larger.
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