Why is the World in debt, how do we pay it off, and why should we care?
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From what I understand, countries invest money to make profit out of it. Most countries could pay it off if they wanted to, but won’t because those investments are more profitable than not having them. So basically, we shouldn’t care about it really
Countries borrow money from investors to fund government expenditures greater than they take in for taxes. It gets paid off by retiring bonds when they mature. If more bonds are issues than mature, the debt grows. If fewer bonds are issued than mature, the debt declines. Governments’ ability to spend more than they take in can be crucial, as times of tax collection reductions correspond with times of needed government spending — times like a recession where stimulus is needed to counter unemployed workers’ loss of paychecks; public emergencies like COVID response and vaccination programs; war
The world is in debt to itself. That is, parts of the world are in debt to other parts. And that debt is valuable for both sides.
For example, a government is in debt to people who have bought government bonds. The bond-holders benefit because they give the government some X dollars now, but get X + Y dollars later, with interest. The government benefits because it can use the money it raised from selling the bonds today to invest in developing the country, which will hopefully result in more economic growth and increase tax incomes to pay off the X + Y dollars that it needs to pay the bond-holders back in a 5/10/20 years. As long as this relationship holds (the government can invest the money and successfully generate more income each year than they need to pay out for the borrowed money, and the bond-holders get their payments when they are expected), then there’s no problem with the debt at all.
Debt is money. Money is created when a loan is made, and money is destroyed when the loan is paid off. If there is no debt, there is no money.
I owe you 100 bucks, you owe Dave 100 bucks, and Dave owes me 100 bucks. It looks like there’s 300 dollars of debt in the world, but we’re really all just at net 0. In reality the numbers don’t quite line up exactly even like this. There’s still definitely countries that owe more or less somewhere, but it demonstrates how misleading debt numbers can look.
By investing in each other’s countries, we can have buffers with each other where we have more or less money available based on our own individual economies. We can also create favor between countries by having regular trade agreements. There’s also an economic incentive to not have trade disputes or even wars amongst ourselves. No one is paying debt to a country they’re currently at war with.
Obviously, it’s an oversimplification, but it’s ELI5.
Debt is great, it’s fundamental to the way our economies work. As the old adage goes, you’ve got to spend money to make money. But how do you get that money in the first place? You borrow it, and go into debt. For individuals that might be something like starting up a company, or buying a house (which doesn’t *make* money, but saves you a fortune on rent).
For a governments, it’s often building infrastructure. Roads, schools, hospitals, power plants etc. are all really expensive. You might be thinking that’s what taxes are for, but it’s hard to justify charging people taxes when there aren’t any roads or schools. So you borrow the money first, *then* build the infrastructure to bring people in and charge them taxes.
So where does the money come from? A lot of the time it’s the counties citizens, in the form of government bonds. Basically a promise that the government will pay you back, with interest, in some set amount of time. People can also invest more directly in a project for a share of the profits. These bonds and investments can be made by foreign citizens, companies, or governments as well.
It only becomes a problem if people stop paying back debt. If the government stops honouring previous bonds, nobody is going to buy any more; all of a sudden they can’t afford to build anything new. They could “save up” tax money, but that’s a very slow process.
All debt is moving future money to the present, at the cost of interest. The idea is that the growth of today will result in a future with higher productivity, allowing the debt to be paid off (while that generation does the same).
The issue occurs when the growth does not match the interest rate. Then the economic system needs to be reset, which upsets some people.
This is a massively generalized summation, of which I’m sure a lot of people will disagree, but here we go.
Consumer debt, on a macro/societal level, means different things to different classes of people. For low to middle class people, consumer debt widens the wealth gap by allowing for the ability to add assets at a higher cost than their value because the cost grows over time through interest while the asset’s value generally decreases over time and with usage. (What is often referred to as living beyond one’s means.) In the long run, this eventually creates a cumulative weight on the spending power of the lower and middle class, which is bad in a consumer spending driven economy. This is infinitely more the case when the debt is used to purchase services or perishables which generally add no long-term value to a person’s wealth and may even decrease wealth through unintended consequences (e.g. fast food = bad for your health, bad health = expensive). Real estate and luxury goods are the only real exceptions to this available to the lower and middle classes, but the level of purchasing power necessary to buy substantial amounts of these types of assets to grow wealth is generally out of reach for the majority of people, gains are also usually unpredictable and slow to realize beyond simple inflation.
There are only three culturally acceptable ways to offset this:
1. Increases in income, which is not feasible as a strategy as wages have been largely stagnant compared to inflation.
2. Moderation, responsible spending, and repaying old debt before acquiring new debt. This is what we tell ourselves we’re going to do, but rarely ever do because we’re playing a losing game of psychological and economic warfare with capitalism. It’s what the wealthy tell us to do and why they blame us when we don’t have traditional success in life. On a micro-individual scale, they’re not wrong.
3. Or, what the wealthy do, have assets that are accumulating value at a higher rate than the interest cost of obtaining new assets through debt. This is why the wealthy are able to use debt to supply liquidity when their assets’ values are unrealized or exist solely on paper. In short, if you have enough money, you can put it to use by growing itself without active intervention. Money makes money, which outstrips out the cost of debt.
Non culturally acceptable solutions are things like bankruptcy and politically unfeasible fiscal policy like consumer stimulus or basic income.
In summary, consumer debt reduces the buying power of the vast majority of consumers in the long run. Less buying power means less input into the consumer driven economy, and therefore less growth over time. The one caveat to this is population growth, which more or less turns the entire consumer debt sector of the economy into one giant ponzi scheme which will eventually collapse, taking us all with it when it does.
>Why is the World in debt?
Debt allows for easier investment. Take a state that want to create an education program. They could wait some time to have enough money to build schools, use the school to educate their population, and enjoy higher taxes from the educated peoples producing more wealth. Alternatively, they could take a loan to build schools immediately, meaning they start educating peoples earlier, meaning they start getting more tax money earlier, so as long as the interest on the loan is low enough that’s a net gain.
That’s not the only reason why debt is used to, but that’s one of the main ones. (I’m using “investment” in a quite general meaning here. The state is not literally trying to generate the most money, it has other objectives too.)
>how do we pay it off?
State could pay it off with taxes. But they would immediately make new loans for some new investments. So instead we use taxes to make those new investments and keep the debt. If we have more taxes than needed, debt is reduces. If we don’t have enough taxes for everything the politician promised, debt increases.
In the ends, peoples you are indebted with don’t truly care if you pay back your debt or not. What they care about is that everyone TRUST you to eventually pay your debt back, so that they can sell the debt to someone else if they ever need cash.
>and why should we care?
As I just said, debt rely on trust.
If your economy crash, you might end up in a situation where you don’t have any other choice than to say “well, we can’t afford to pay our debt, so since we’re a state we can just say that this debt doesn’t exists any more”. So everyone you own money to will lose a lot.
That means that if your economy is about to crash, everybody that has some debt with you will try to sell it before your crash. But no one will want to buy the debt, so they’re stuck with debts that are about to be erased.
That means that if your economy is about to be about to crash, peoples will try to sell before your economy is about to crash.
That means that if your economy is about to be about to be about to crash, peoples will try to sell before your economy is about to be about to crash.
Etc.
And why is that a problem? Well, as soon as peoples start to think that the economy is about to be about to be about to …. to crash, then no one will want to loan you additional money. And if no one want to loan you additional money, then suddenly you have problems to make new investments, and your economy MIGHT actually crash, realising the prophecy that everyone was fearing.
And the MIGHT here is important. Because states are usually pretty good at handling crisis. So as long as they are not “too indebted” and don’t rely “too much” on loaning money, the state can pretty much guaranty that they won’t fully crash and be forced to erase their debt. Well, unless they’re incompetent and start making counterproductive measures, but you get the idea.
And the truth is that no one really know how much is “too indebted” and how much is “too much” (and in practice, it also depends on which risk you consider: do you expect the state to never crash, even in case of a nuclear war?).
We should care because if we inadvertently cross this “too indebted” and “too much”, things will go in a downward spiral from which it is difficult to break through. And something that is even more difficult to control, even if our level of debt remains the same, if suddenly peoples realise that we crossed this line a long time ago, then the downward spiral will start.
It’s a scam and it’s impossible to get out of debt. At least the kind of debt the US has built up. It’s meant to keep societies burdened.
Imagine all the money in circulation was printed and it needs to be paid back at .01% interest. Now I ask, where does that society get the money to pay the interest. So more money is printed/borrowed from the FEDERAL RESERVE, a “private” company.
The promise of a generationally indentured future 🙂
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