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
For a country to be successful, you need infrastructure. To build it out, you need money. But you know once you build it, country will be wealthier, so you can pay it back and still have more left over like if you didn’t borrow them at all.
So they borrow to invest and they get even more money back in taxes, everybody is happy.
If the economy grows, for example, 3% and government borrows at 2%, they are actually making money on this! (because bigger economy brings more taxes) So there is really no reason not to borrow, if you can get low interest rates. It would actually be bad for country not to borrow.
Who do they owe? Mostly funds, which manages retirement money, but also central bank buys some (though this is limited because buying too much would cause an inflation). Funny thing is, that central banks profits is going back to government, so the debt that is bought by central banks is basically free. But government has no control over how much central bank buys.
Debt is a tool. Countries like all corporations have debt that they use to invest in projects to improve their revenue. Examples being, governments spend money on education and infrastructure. Roads help people get to work, education helps them get higher paying jobs, all of that income results in more tax revenue.
Corporations use debt for things like R&D, or to build a new factory or data center, which they use to make and sell more products.
They owe that debt to investors, who buy bonds. Average people like us basically.
There are some good answers here and some questionable ones, but I think a major point is being overlooked:
If you aren’t leveraging your resources, you are wasting opportunity. Put another way, if you aren’t using your income to secure debt, you are not being efficient.
Imagine you’re a farmer with 100 acres of fields, but right now only 50 acres are ready for use. If you grow a successful crop, you could develop another 10 acres with one year’s profit.
So one option is to slowly but steadily expand based on your available cash. For simplicity’s sake we can say it’ll take 5 years to develop the rest of the fields this way.
Another option, since you have a reliable source of income, is to take out a loan and develop all of the remaining fields at once. This way you can farm all 100 acres immediately for the next 5 years instead of slowly building up to maximum capacity.
Typically, one will earn much more by farming all of the fields and paying interest on a loan than by slowly building up to full capacity without debt. Looking at it this way, not taking on debt can actually mean you are losing money because you just aren’t farming all of your fields.
Since farming has some inherent risks, sometimes it can make sense to not take out a huge loan to work all your land right away. If the crop fails, then it could mean trouble for the farmer.
But most countries have stable governments with pretty predictable revenues and expenses. Unless major political upheaval is on the horizon, it makes the most sense to go into as much debt as a country can sustain. If a government fails, it means a lot of a different kind of trouble for everyone involved.
Like the farmer with half of their fields tilled, most governments also have ample opportunities for investment. New roads, utilities infrastructure, schools, and hospitals will start improving citizens lives immediately. A new highway could lead to a new city and potentially generate thousands of homes and jobs and millions in tax revenue. A new hospital could serve and save thousands. There is almost always more that could be done.
To not go into debt is to tell your citizens to accept the current situation because the government does not expect to pay back what they could borrow. So most countries will take on loans to make big investments to serve their people, and to show strength both at home and abroad. This is why most countries are in debt.
But governments do fail. There’s a broad history of national debt crises, their causes, and consequences. Sometimes governments borrow from their citizens, sometimes they borrow from abroad. Sometimes countries get a slap on the wrist for defaulting and are forgiven, other times severe punishments are served. Like I mentioned earlier, governments not paying their debts are usually the result of larger problems.
Here’s a brief clip that mentions some [relatively recent examples of countries that have defaulted](https://youtu.be/KlE8eFEKlz8). I’m sure it would be an interesting exercise to dig deeper into the causes and consequences of any of these cases.
Sorry I don’t have a good book to recommend that summarizes this history in a broad sense. Actually I’d be interested if anyone knows of relevant books written from a scholarly perspective. With this becoming such a heated topic, it’s no fun to dredge through all the alarmist content creators.
Because they get absolutely fantastic terms for their loan. Cheap enough loan is basically free money and of course a government being a rather reliable debtor with guaranteed income base is going to get very cheap loans. Often the debt is auctioned off, government borrows from whoever gives the best rates. But as the mountain of debt increases, then they become less credit worthy, they don’t get that good terms anymore and borrowing gets expensive so that’s the soft ceiling to how much a government can enjoy cheap money.
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