How do governments manage massive amounts of debt without going bankrupt or running out of money?
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It’s important to differentiate debt from deficit – this is particularly true for countries that have control over the production of their own currency. Politicians will often talk about them as though they are the same thing, but they aren’t. A nation that controls its currency can, and often does, issue more currency to meet their spending needs, and this enters the books as a deficit. This money was created, and not borrowed, so it doesn’t need to be ‘paid back’.
Where a currency-issuing country does have actual debts to pay (where they have borrowed), they pretty much can’t default on repayments – if they wish, they can always create the necessary money to meet the repayments.
So, deficits are fairly meaningless in a lot of senses. They are just a potentially big number that fiscal-spending-averse politicians use to frighten voters who don’t understand that government finances aren’t like household finances (a household can’t just type more money into their accounts to meet their commitments). As long as inflation isn’t running rampant, then the deficit isn’t too big.
The government might be in a huge amount of debt, but they are also making a huge amount of revenue. Think of a person buying a house. A mortgage could put someone hundreds of thousands of dollars into debt. However, if that person has a good steady job, they will have no problem paying off that debt in 20 years. It is the same for the government. They may be 20 something trillion dollars in debt, but if they chose to put a trillion dollars aside per year (which the USA could without much issue), the could pay off the debt in 20 years.
They can. Orange County California declared bankruptcy in 1994.
The US government, however (and other sovereign nations) cannot, because US debt is issues in US dollars, and the only entity in the world that can generate US dollars is the US government. So the US government can always generate more US dollars to pay off its debt. If we ever got to this point it would be very, very bad for our economy.
‘Government bonds’, people can buy them it’s an IOU. The government pays interest on these, so it’s profitable for people to buy them. In essences, it’s like the government is borrowing from its future self.
The problem is as you point out how do they manage it. The interest does build up and the more borrowed, the more part that has to be paid. Which means there is less money to spend and more has to be paid to level out the interest owed, and so more has to be borrowed.
There is a deficit ceiling if they owe too much the economy can collapse. This is a very argued and uncertain subject mind but may have been a significant part of what happened to the economy in Greece. Some governments introduce austerity (restrict government spending to try pay back as much debt as they can quickly) to mitigate the debt’s impact.
Edit: typo
So people often think of government debt as being a sort of “I borrowed $500 from my friend to make rent this month” kind of situation, but it’s very different.
Most government debt is in the form of bonds (or similar notes). These are notes that say “Buy me for $100 today, and cash me in for $130 in 10 years.” When someone buys one, the government is now $30 deeper in debt: they added $100 to their wallet while putting a $130 IOU on their books. But they have 10 years in which they can use that money.
So say they raise $2 billion from selling bonds, creating $600 million of debt. They spend part of that $2B on a program to eradicate pests nationwide, part on treating and preventing disabling illnesses, and part on building public schools. As a result, after 10 years, crop yields have gone up, workers have remained productive and healthy longer, and better-educated citizens have driven up wages and productivity. All of that means higher tax income for the government, long-term — maybe it’ll raise an extra $600M over what it would’ve been by the 10-year point, but it’s okay if it takes longer. In the long run, it pays off.
It would be analogous to an individual taking out student loans. Imagine going to university/college only for people to tell you “You put yourself in $60,000 of debt and you don’t even have a job while you’re doing it, that’s irresponsible.” But you know it’ll pay off eventually. But with the government, it’s not just going to school to get one or two degrees. Opportunities arise every day of every year, endlessly. For a government, anything that significantly raises the productivity of the country overall is an investment that eventually pays off, and there are so many opportunities for that sort of investment, including many that are only really available to a government. To a government, an investment that takes 75 years to pay off can still be totally worthwhile, and paying to teach some random toddler to read can be worthwhile. If you see lots of opportunities you’re highly confident about about, and you can borrow money in large amounts with relatively little interest, why *wouldn’t* you borrow money to invest? And so the debt keeps growing for as long as people are willing to lend more and more money (buy more and more bonds). People are willing to buy more and more bonds because you consistently pay them back. If you frequently ask me “lend me $10 and I’ll give you $11 tomorrow”, and you keep your word every single time, day after day for 140 years, well then yeah, of course I’m gonna agree every time you ask. And you don’t eventually run out of money because, when it comes time to pay me back, you’ve always found a way to turn $10 into $12.
Quantitive easing is the term used. e. g.
Remember the sweets/candy you bought as a child for 1c/1p. Today it’s either the same price but less product or same product but more cost.
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