How can an economy be bases on debt , such as the US, and how does it work?!
In: Economics
Economies are not “based on debt”, that’s not an economics concept.
Economies have government debt in them, and private debt as well, because investors see the economy as stable enough to risk present day money in favor of having more money in the future. The higher the debt level an economy can support without inflation, the more large and stable the economy is.
By investing the money today in the countries future economic growth.
Say there are two cities either side of a big river.
The government thinks – “hey, if there was a bridge between these cities, then goods and services could move more easily and improve the economy, which we can then tax”
The engineers say building a bridge will cost $1 billion.
“Dang” say the government. “We don’t have $1 billion lying around. It will be years before we save up enough tax dollars”
“But wait!” say the bankers. “We’ll give you $1 billion today and you can pay us back later + interest.”
So the government take the loan, build the bridge and the additional revenue from the improved economy more than covers the interest on the loan they took out to build it.
Even though many countries are in debt, the creditors know they’re good for it. They can even sell the debt on to other people, so it gets traded around.
It is not based on debt. US economy is mostly based on services, with some manufacturing and a small share of agriculture. Debt is just a way to account for money flows; no economy is “based” on it.
This is a bit of a skewed viewpoint. Modern industrial economies (most) are based on private capital acting in a somewhat free market.
Capital (like debt) is an accumulation of fundamental resources – labor, land, expertise etc. In a mostly agricultural economy – most of the population live in a “pay as you go” lifestyle. This limits the ability to accumulate the capital necessary for a modern industrial economy. Think about it – a modern factory has land, buildings, equipment which are accumulations of labor/expertise. Without a system of capital accumulation, modern technological society would be impossible. Part of the accumulation of capital is the ability to pay people for their labor ahead of the time when their labor is utilized for production. For example: you need to pay the builder of a building before that building can be used as a factory. One means for this is to use debt to allocate this capital more efficiently.
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The USA may be in debt, but it does pay off its debt; debt isn’t terrible if you have plan to pay it back. It is often better to have some money now then more money later. With money now, you can build and invest so that your investments will pay off later. If you plan it right, the investments you buy with your loaned money should be worth more than what you will have to pay back in interest. This is especially true with lower interest rates. The USA keeps going into debt because it keeps investing and thus makes more money.
This only becomes a problem if you don’t invest properly and don’t make money from your loans. Not only do you not make money, you lose money from interest payments.
Can you clarify what you mean by “based on debt”? I think what you’re getting at is the fact that most national economies borrow money to pay for stuff, but I want to be sure before I give an answer.
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