A lot of people believe or rather assume that debt does not matter as governments around the world owe money to the public, and not the aliens.
However, it matters for two main reasons. Firstly, if the debt grows at a faster rate than the economic output, it implies higher interference of the government in the price mechanism/free market economy. This results in higher taxes being levied (strict fiscal policy) to finance the deficits and we all know that taxes are bad in the current scenario as they discourage spending.
Secondly, the issues faced by current and succeeding governments. No sane government would like to lay an impression on the public that the debt per citizen is on an increasing trend. This comes with political repercussions.
This is indeed a vicious cycle and I am still figuring out the start and end points of the cycle. Kindly, assist!
However, it matters for two main reasons. Firstly, if the debt grows at a faster rate than the economic output, it implies higher interference of the government in the price mechanism/free market economy. This results in higher taxes being levied (strict fiscal policy) to finance the deficits and we all know that taxes are bad in the current scenario as they discourage spending.
Secondly, the issues faced by current and succeeding governments. No sane government would like to lay an impression on the public that the debt per citizen is on an increasing trend. This comes with political repercussions.
This is indeed a vicious cycle and I am still figuring out the start and end points of the cycle. Kindly, assist!
I really like your articles.
ReplyDeleteTo add to what you have written:
Why is debt taken by an individual or a government? To finance spending which is more than the income.
If the spending is capital expenditure like building infrastructure or anything that adds or helps to increase productive capability then its positive else if its for consumption then its negative.
Debt itself is therefore not bad if its taken for increasing productive capacity of the people or the country. However, countries have a history of taking it for consumption or wasteful expenditure like for wars in 16th, 17th, 18th and even 19th century or for luxurious consumption or show off or for speculation i.e. increasing value of something by artificial demand.
Over leverage for a person leads to bankruptcy and for a country leads to devaluation in currency or hyper inflation followed by economic crisis that results in austerity that lasts for a long time.
I would suggest reading this book - This time is Different: Eight centuries of Financial folly by Carmen Reinhart and Kenneth Rogoff. (http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165) - A timeless master piece written by two professors. Its a must reading for all bankers and policy makers.
thanks
Savishesh
Sure I will read the book mentioned above...thanks for the appreciation and continue reading :)
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