Why do governments care so much about reducing public debt if they are the sovereign issuer of their currency?

145 views

[ad_1]

Why do governments care so much about reducing public debt if they are the sovereign issuer of their currency?

In: Economics
[ad_2]

It costs money to service public debt (pay the interest). The government could print more money to pay off its debt, but this increases the total amount of money in the economy and so leads to inflation. This is called devaluing the currency and is a valid fiscal policy carried out historically in many countries. The problem is that next time you come to borrow money potential lenders will be cautious. They don’t want to be paid back in money that has just been devalued because by definition that money is worth less. So lenders will want more interest, making the new debt more expensive for the government.

I hope that makes sense.

It’s about confidence in the system. Too much debt signals a weak economy which can result in a country’s credit rating to drop. This will potentially cause creditors to start calling in debts. Printing excessive money causes inflation and will destroy an economy. Imagine a loaf of bread costing a millions dollars.

I’m not an economist but basically it has to do with supply and demand.

These two factors are always more or less balanced. If you pump currency into the market it’s value will drop.

Think of it this way. You have a basket of apples that you want to trade. Each apple is worth one orange. All of the sudden the farm next door starts supplying more apples then they used to. They’re willing to trade two apples for one orange. You used to be able to get an orange for each apple but now, because there’s more supply, you can only get half as many because people can just go trade next door decreasing the demand.

Now imagine that the apples are currency (the oranges can still be oranges). This is called inflation. It’s the increase of prices and fall of purchasing power.

If the government decided to print money to pay off their debts they would flood the market with currency and crash its value.

Different governments have different regulatory bodies monitoring their currency and trying to manage debt, inflation, and purchasing power but it’s not an exact science so everyone is basically just doing the best they can.

TLDR: All in all it’s a very complicated system but the short answer is: the more money you print the less it’s worth.

Truthfully they don’t. The rhetoric about national debt is a very effective bludgeon for reducing spending on social programs. Those who claim to worry about debt NEVER want to fix the problem by cutting military spending or by raising taxes, they only ever propose to solve the problem by cutting the already paltry amounts given to things like food assistance and Medicaid. Many sovereign countries have far higher debt ratios than the US without significant problems. Anyone in power knows this, which is why national debt reduction is an ideological rather than economic project.

Because you can’t just print money to get out of a debt hole.

Debts spending works if future returns on the spending work out to more than the principal + interest, but this depends on continuous economic growth, which we’re told is not sustainable. Which is true.

If you print money to get out of a debt, people that may otherwise lend you money realize it’s not worth very much, and stop lending you money.

Aside from more specific reasons, there are literally thousands of years of history with examples of countries issuing too much currency and causing financial catastrophe. Even if you think you have good reason to believe that this time will be different (which maybe you do) it’s not an easy history to ignore

It’s mainly for political rhetoric. I don’t want to get political but it is a political question imo. It is easier to tell poor people the government can’t help them than it is to tell them that it can but they (senator/representative) are ideologically opposed to it.

Some posts here obviously influenced by mmt and since you mentioned “sovereign issuer” I want to assume you are already aware of who they are since that is a phrase they commonly use.

MMT sometimes is interpreted as saying the debt doesn’t matter but this would be a hyperbolic statement and isn’t entirely accurate. Treasury bonds are used as collateral by the banks and are safe assets unless congress deliberately defaults on them. Until that happens they are a source of stability in our financial system, in contrast to more riskier assets like mortgages. Banks did not have enough treasuries and so resorted to securitizing other assets such as mortgages which led to the 2008 crisis. Some economists say that the debt was not high enough and that Clinton paying down some of it in the late 90’s was in fact a bad move and we suffered for it in 2008.

There are obviously downsides to this though. For one, they are a source of income to people who already have a lot of money and so contribute to wealth inequality which is a real general economic issue certain economic schools see whereas the mainstream largely choose to ignore it.

All econ, which people forget, is about trying to model the behavior of people so we can get preferred results.

When you prioritize debt, you stagnate because you legitimately don’t understand how a mortgage works. Moreover, this typically comes at the disadvantage of the poor. When you disregard debt, as the sovereign issuer, people don’t invest in your country.

So if you have those two extremes, it makes sense that choosing a middle ground will yield some intermediate result. You can shift one way or the other depending on what you wish to emphasize.