Or does the government already do this? If so, can anyone explain like I’m five?
Isn’t that just paying the debt?
Came hear to say exactly this. I’m no expert, but this sounds like the right answer
Because being in debt is not bad… as long as:
- You retain people’s trust in you, so they don’t ask for it back,
- Or, you can get more new debt as you pay the old one,
- And/or, you can force people to STFU about you being insolvent, “or else” (in the shape of an army, an orange face, or whatever).
Debt is only bad when someone asks you to pay all of it back at once, with interests. As long as they don’t, then the more debt you get into, the more stuff you get basically for free.
Everyone likes free stuff.
They do, kinda.
The government can raise money multiple ways:
- Taxes (large amount, but slow fixed rate)
- Print Money (immediate, but causes inflation and can wreck your economy if you do it too much/fast)
- Sell bonds (debt) (Immediate, but need to be paid back with interest)
Bonds by default have a period (10Y, 20Y, etc) on them, after which the issuer pays the whole amount back (and they’ve been paying interest the entire time)
The public debt is really just a bunch of these bonds, and they’re constantly cycling through. If the government doesn’t want to use tax money or print money to pay them off, they just issue new bonds, and use that money to pay for the previous bonds.
Sometimes the government wants to push the debt down, so they use taxes or printed money to buy the bonds and “cancel” them. Governments don’t always run deficits so this happens automatically when they have a surplus.
So to answer your original question, the reason they may not want to, is that they may want to spend the tax money elsewhere, or they may not want to deal with the problems of printing so much money regarding inflation.
It’s worth noting that a solid link between money printing and inflation has to my knowledge never been demonstrated outside of hyperinflation scenarios. The chief problem being that there are far to many inputs to inflation and deflation to solidly say how much influence some of the smaller ones like total money supply have.
According to MMT (Modern Monetary Theory) governments sell debt in the form of bonds in order to create a stable store of value for investors. They feel safer making risky investments if they know that some if their money is safe. Governments, particularly governments with fiat [1] currencies, are extremely safe borrowers. You can more or less guarantee that their bonds will be paid back. Because if a government wants to pay that bond back they are incapable of running out of money. So governments could buy their bonds back and forgive them but it would defeat their actual purpose. I read about MMT in The Deficit Myth. It’s an interesting book and worth the read if you want a different perspective on monetary theory.
- Fiat in this case means the currency is not based on any asset. Common currency basing assets are gold, silver, petroleum, and cryptography.
I don’t really think it’s fair to compare silver or petroleum to crypto. I can run a car on petrol and make self sterilizing utensils with silver, can’t encrypt my emails with crypto currency.
I get that it is about there being a limited supply but that doesn’t really stand considering fractional reserve banking can be done with those others but not really with crypto.
Not disagreeing with you, just kinda thinking out loud, (thinking out written? IDK.)
Nowadays (post-gold standard) crypto is more similar to gold than to fiat; you can’t eat either, but the value of crypto and gold comes from whatever people freely want to pay for them, unlike fiat’s value which gets enforced through taxes and armies.
Gold is also fungible, and doesn’t get consumed during normal use, just like most popular crypto projects (although some are neither, and explicitly “burning” crypto makes it unrecoverable).
fractional reserve banking can be done with those others but not really with crypto.
You’d think that… but crypto ETFs say otherwise. You can also look into Sam Bankman-Fried, an extreme case of “fractional reserve” (aka: scam).
General rule: not your keys, not your crypto… and you better have the holder of “not your crypto” thoroughly audited on a regular basis.
Gold value was also enforced by armies and taxes. It has uses nowadays that it did not use to have. Used to be gold was only useful as a decoration or as a coating that wouldn’t tarnish. The actual value was that you had to pay taxes in it.
Crypto has no value, less value than fiat even, because I can’t buy groceries with it, nor can I pay taxes with it.
Also, you can’t fractional reserve crypto unless you’re using a second crypto currency backed by a first.
Gold value was also enforced by armies and taxes
The history of gold, and other metals like silver or copper, is quite interesting. They started by having an intrinsic value, then some governments tried diluting it, failed and they went back to intrinsic, then finally the Venetians managed to apply inflation to it, ultimately the gold standard was abandoned by the US in the 1970s… and anyone trying to reinstate it (Saddam, Gaddafi) got on the wrong side of US’s army.
Crypto has no value
It has the value of whatever people assign to it. You definitely can find places to buy groceries with it, or anything else; there are even credit cards in crypto that will convert to whatever the seller wants.
you can’t fractional reserve crypto unless you’re using a second crypto currency backed by a first
Or an ETF. There are plenty of banks offering to “sell you crypto”… except you can’t transfer that “crypto” out of the bank. There is no way to know whether they even have any of it.
They can just not pay them back, defaulting basically.
But then their ratings will go down (a LOT) and basically they will not be able to loan any more, at least not on favourable terms because the market doesn’t trust them anymore.
That’s literally what they do, just “paced”. See: https://en.m.wikipedia.org/wiki/Government_bond
About 22 percent of the US government’s national dept is money one department of the government owes another part.
Offhand, the majority of the government dept is in government lines and bonds. While the government can buy back its own bonds, people tend not to sell said bonds for less than their worth and so you would need more money than what it takes to just pay off the bond. Moreover, said bonds are generally low interest, and so often get smaller with inflation.
In addition, most banks, mutual funds, hedge funds, large corporations, etc… tend to have rules that say that there is only so much financial risk they can be exposed to, so if they want to make a high risk high reward bet, they need to have a certain amount of low risk of investments aswell. Government bonds are seen as about the lowest risk investments possible, and so can often be more valuable than just the money the bond itself is actually for when used as the bedrock upon which the modern risk based US financial system is built on.
Given that bonds have an limited lifespan, it’s almost always cheaper for the government to let it time out then to buy it back.
Similarly, a not insignificant part of it is in pentions. Basically when you work for the government your paycheck says you get X part of your pay now, and Y when you retire. The idea is that no matter how bad you are at managing money or if you get a bunch of medical dept or such, you have a guaranteed retirement fund. Meanwhile, from the governments perspective, thanks to inflation Y is going to be worth a lot less real money when you take it out then if they gave it to you now. Y is dept, and since the government employs a lot of people, Y is actually quite a lot of dept.
Because no one would want to loan them money after that.
It has to have the money to do that and it needs to run a surplus to do that. Meaning reduce spending increase taxes. Political forces are to reduce taxes and increase spending. Your are asking politicians to not play politics and people to support that. What are the chances.
Also people would have to be willing to sell them at a price that seemed reasonable. Most government bonds are not callable meaning redemption cannot be forced.
