It seems most countries will keep adding debt indefinitely. How will this play out long term?


It seems most countries will keep adding debt indefinitely. How will this play out long term?

In: Economics

Since most countries experience some inflation, they can indeed keep adding debt indefinitely with no problematic effects.

Worst case, it would lead to much higher-than-desired inflation.

As long as the government can continue to service the debt it really isn’t a problem.

Sovereign debt is not at all like the personal debt most people are familiar with. It isn’t a loan from anyone, it’s a country selling bonds and other financial instruments.

The US actually tends to make money from issuing debt, as US bonds are issued at rates lower than inflation most of the time.

When a country issues debt, it has the benefit of being able to “inflate away” that debt. 200 years ago, a $1,000 loan would have been a big deal, but today it’s not. Therefore, if a country were to have a balanced budget for a very long time, the importance of its debt would *decrease* until it was basically nothing. Likewise, if a country consistently runs a deficit that is not too large, the importance of its debt can stay about constant. This means that there’s no particular issue with a country adding debt indefinitely, though it’s sometimes hard to see the line between an acceptable deficit and one that is too large, hence the constant political discussion about it.

If the debt’s in another country’s currency, then at some point they will probably end up printing more than they can pay, and have to tell the people who bought their debt “no, sorry, you’re not getting the $120 you were promised for loaning us $100, you’re only getting $75.” This is called a “default,” and it makes it a lot harder to convince other investors to loan that country money in the future. Would you loan money to somebody who’s already broken a promise to pay back loans?

If the debt’s in your own currency, at some point you’ll probably borrow too much. But you have the option to fix it by printing money to pay back the loan. This makes your money worth less, which can ruin your whole economy if it runs away. But if that doesn’t happen, it’s a less disruptive way to settle your country’s bad debt. (1) Everyone does get what they were promised, it doesn’t make investors nervous like broken promises. (2) It spreads out the pain to everyone who uses your country’s money, not just the creditors.

Your country might have trouble borrowing money in its own currency — If your government has a history of printing money willy-nilly, or otherwise fails to stabilize the value of its currency, or has a history of defaults, or simply if your country is seen by the people with money as a small, unimportant place.