The Perils of National Debt: How Countries Pay and What They'O Actually Paying For

Every country engages in borrowing, and it is a matter of common knowledge that national debt is an insurmountable issue for many nations. In this article, we explore how countries manage their debt, the mechanisms through which they repay it, and the implications for both bondholders and the general populace.

Augmenting Debt to Serve Debt: The Mechanics of Repayment

When countries face the unenviable task of repaying their debt, they often have to resort to creative strategies. The most common methods involve rolling over debt or taking out new debt to cover the payments. This process ensures that the debt never truly goes away. A significant portion of this national debt consists of government bonds, which are sold to anyone willing to buy them, including citizens themselves. Hence, the circle of lending and borrowing continues.

The concept of paying interest is another critical aspect. When a country borrows money, it promises to pay interest to its lenders, often investors. However, the repayment of principal is a murky issue.

Government Bonds and the Risks of Capital Return

Government bonds promise capital return, but it's not a guarantee. The government can always tax the population to repay the debt. Moreover, the only way bondholders can see their initial investment returned is through the issuance of new tax revenue. This mechanism, essentially, means that bondholders end up with new taxes in exchange for their debt holdings.

Alternatively, the government can print money to repay the debt, stripping the value of the bondholders' holdings. This policy leaves bondholders with worthless money, effectively cheating them. In this scenario, everyone ends up paying through a currency that doesn't buy much.

Central Bank Buying Bonds: The Hidden Cost to All

In some cases, the central bank intervenes by buying the bonds. While this might seem like a solution, it ultimately leads to currency inflation. Higher inflation lowers the purchasing power of the national currency, basically, everyone in the country pays through a currency that's rendered less valuable.

Borrowing Denominated in Own Currency vs. Other Currencies

The nature of the currency in which a country borrows significantly impacts its ability to manage its debt. Countries with significant economic power and stable institutions can issue debt in their own national currency. This approach grants a certain level of autonomy since the government can control inflation by printing more money. However, this power must be used judiciously, as reckless inflation would swiftly erode the value of the national currency and deter investors from lending more.

In contrast, countries that borrow in foreign currencies must adhere strictly to the terms of their loans. Defaulting on these loans would lead to negative credit ratings, making it nearly impossible to secure future loans. Hence, these nations must follow the creditors' terms closely, whether they involve interest payments, rollovers, or other financial obligations.

Exorbitant Consequences of Debt Defaults

Historically, many countries have struggled with paying back their loans. During the Middle Ages, for instance, kings and lords often forced Jews to lend them money, only to expel them when the loans were due. Such actions were not unique to Jewish lenders; any lender faces severe consequences if a country defaults on its debt.

When a country cannot or will not repay its debt, it faces significant challenges. Instead of paying with money, the country may offer policy favors, such as tax breaks for favored companies, or exploiting natural and human resources. In grave cases, a country might trade land, large tracts of thousand of acres, or lease ports for 99 years, effectively giving a favorable stance to the lender.

In conclusion, the management of national debt is a complex and often contentious affair. Countries must walk a fine line between financial responsibility and fiscal agility. The ultimate payment is not just with money but can encompass policy and resources within the country, making national debt a far-reaching issue with far-reaching implications.