Why is the World in debt, how do we pay it off, and why should we care?
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>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.
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