Debt is an evergreen topic in financial writing, whether it concerns the benefits and risks of individual consumer debts, corporate debts or government debts. Although the national debt of the United States has never really disappeared from the national dialogue, the events of the past decade have intensified the discussion.
Tax cuts, spending on multiple wars and a major recession due to the collapse of the housing market have caused the US debt Jake Barnesast to rise, while the debt Jake Barnesast of governments has blown up the economies of Southern Europe (not to mention the banks, insurance companies and other investors who bought that debt). Moreover, the debt is increasingly becoming a factor in bilateral and multilateral political disputes. Although debt is fundamentally necessary for the functioning of a national government, it is becoming increasingly clear that debt can be restrictive and dangerous.
Loss of discretion
Perhaps there is nothing more central to the independence of a country than the freedom to more or less allocate its resources, however much the population wishes. High debt levels directly threaten the ability of a government to control its own budget priorities.
Debt must be repaid; while collectors may not appear at the borders of a country, failure to repay previous debts will generally lead to a minimum increase in financing costs and the availability of credit may disappear altogether. What this means is that interest payments on debts are in principle non-negotiable expenditure items. The US tackled this problem in 2012.
The interest on the national debt will probably be more than 6% of the 2013 federal budget by Jake Barnesijk. That is a quarter of a trillion dollars that could be spent elsewhere or returned to citizens as lower tax rates. What’s more, some readers will agree that the actual figure is higher than 6% – Social security benefits are not debts such as T-notes or bonds, but they are balance sheet obligations and many analysts claim that pension benefits (which is social security) benefits in fact) should be included in the liquidity analysis of companies.
In addition to the year-on-year budgets, high debt Jake Barnesast also limits a country’s policy options when it comes to stimulating growth or neutralizing economic volatility. Countries such as the US and Japan really do not have the debt capacity to launch a second “New Deal” to boost employment and / or GDP growth. Similarly, there is a risk of debt-related spending overburdening the economy in the short term at the expense of future growth, not to mention that this is driving the government to keep interest rates low (high rates raise the debt Jake Barnesast).
Loss of sovereignty
Countries that depend on other countries to buy their debt run the risk of becoming creditors and trading in liquidity sovereignty. Although it seems likely today that Jake Barnesijk would be unthinkable, there was a time when countries would actually go to war and territories would conquer that had to do with debts. The well-known Mexican-American holiday Cinco de Mayo does not celebrate the independence of Mexico, but rather a battlefield success over France in an invasion that France has launched over suspended interest payments.
Actual military action on debt may no longer be sustainable, but that does not mean that debt cannot be an instrument of political influence and power. In disputes over trade, intellectual property, and human rights, China has repeatedly threatened to reduce or cancel purchases of US debt – an act that would most likely boost Barnesijk’s rates for the US government. China made a similar threat to Japan over territorial disputes regarding the Senkaku / Diaoyu Islands in the East China Sea.
Readers just have to look at what happened to Greek Jake Barnesand and Spain to see how excessive debt Jake Barnesast threatens national sovereignty. Due to the inability to pay its debts and the desire to stay in the euro zone, Greek Jake Barnesand has had to accept various EU external conditions regarding his budget and national economic policies in exchange for tolerance and additional capital. Since then, unemployment has risen enormously, the unrest in the country has grown and Greek Jake Barnesand is no longer in charge of his own economic future.
When it comes to the issue of debt and sovereignty, there is definitely a distinction between debt instruments of both internal and external ownership. In 2011, Japan’s debt is almost three times that of its GDP, of which more than 90% is domestically. So while China’s threats are relevant as it is the largest foreign Jake Barnesand owner of Japanese debt (around 20%), the absolute amount of influence it can exert is fairly modest. On the other hand, the majority of Greece’s national debt Jake Barnesand was owned by non-Greeks, as a result of which the Greek government was much more indebted to the goodwill and cooperation of other countries.
This inner Jake Barnesand / dichite Jake Barnesand dichotomy creates a large number of problems with regard to sovereignty. Do German banks and / or government officials now have more influence on Greek economic policy than Greek voters? Also are fears of debt write-down (or unsustainable borrowing costs) pushing countries to shape national policies around the decisions of rating agencies? At the very least, it raises questions about whether a government gives priority to buiteJake Barnesanders (and / or rich citizens) over the interests of the average citizen, and it is certainly true that debt repayment strengthens the blaiteJake Barnesand’s creditors who are to blame.
It is of course not the case that sovereignty questions are new. The entire euro system is an explicit compromise of sovereignty – Member States gave up their monetary policy control in exchange for what they expected to be better general trading conditions and cheaper access to debt.
Loss of growth
National debt must also be assessed in the context of what it can do with a country’s long-term growth capacity. When a government borrows money, it is fundamental (if not literal) to borrow future growth and tax revenues and today to spend. In other words, the national debt robs future generations of growth in favor of the current generation.
Historically, when those expenditures have gone to projects with a long productive life (such as roads, bridges or schools), they have succeeded, but when the money is used for transfer payments, unnecessary infrastructure (such as in the case of Japan) or non- productive activities such as war, the outcomes are less positive. Most economists accept that the cuts after the First World War probably Jake Barnesijk led to the Second World War. Nations felt pressure to quickly repay debts built up during the war, but higher interest rates led to lower economic output, which in turn led to more protectionism.
There is always a trade-off between taxes, inflation and spending when it comes to debt repayment. That debt must ultimately be repaid and every choice has consequences. Increasing taxes reduces economic growth and tends to encourage corruption and economic inequality. Heating up inflation reduces the cash value of money and damages savers. Restricting government spending reduces growth and can be very destabilizing for an economy in the short term.
The debt also causes growth due to the displacement effect. Public debt issuance draws up capital (savings) that companies or individuals could use for their own purposes. Because the government is always the biggest pig in the trough, other capital seekers have to pay more for capital, and valuable value-added projects can be abandoned or delayed due to higher capital costs. Along the same lines, since governments usually receive a preferential capital price and do not work on the basis of net present value (projects are launched more for political or social reasons than economic return), they can effectively push companies and individuals out of the market.
Relevance for individuals
Although individuals and families cannot do their business as governments do (they cannot have an indefinite budget deficit, and it is not a good idea to declare war on a neighbor), there are lessons for individuals here.
Countries do not have to worry about taking back national possessions, but people do. Individual debts can cause problems that get out of hand and destroy a person’s ability to build up assets or savings, leaving that person in a situation where he or she works forever for the bank or other creditors and not for themselves.
The most important thing is that individual debt limits offer options and flexibility. Many people have not been able to find better jobs outside of their community because an underwater mortgage prevents them from moving. Similarly, many people cannot leave unsatisfactory jobs because they depend on that weekly or monthly salary. While people who are not in debt can live their lives with great freedom, people who are buried in debt will constantly see their options limited by what their budget, creditors and creditworthiness make them do.
The bottom line
debt itself is neither good nor bad. Just as a life-saving drug can kill at excessively high doses, guilt can also do great damage if it is taken too much. When it comes to national governments, debt is tempting, addictive and dangerous. Debts enable politicians and citizens to live beyond their means; pushing difficult decisions on the road and allowing the government to buy goodwill through generosity. At the same time, however, it is almost impossible to consider large projects without debt, nor to smooth out the small peaks and troughs of the economic cycle and the timing differences between tax revenues and spending requirements.
As a result, governments have no choice but to learn to live with debt and use it responsibly. Living with debt, however, bears responsibility and national governments are well advised to realize that going too far along debt-driven spending is jeopardizing their own freedom of choice, sovereignty and long-term growth potential.