Lecture
Public debt (also known as “public debt” or “national debt”) is the debt of the central government. In the United States and other federal states, the term “public debt” may also refer to the debt of a federal or regional government, municipal or local government. At the same time, the concept of an annual “state deficit” or “state budget deficit” refers to the difference between revenues and government expenditures over one year, that is, an increase in government debt over a certain year.
Public debt is one way of financing public operations, but it is not the only method. Governments can also print money to monetize their debts, thereby eliminating the need to pay interest. But this practice simply cuts government spending on interest, rather than canceling out a truly public debt, and can lead to hyperinflation if used without measure.
Governments can be monetary sovereign or non-sovereign monetary. Monetary sovereign (MS) governments create laws according to which they create their sovereign currency. Monetary not sovereign government uses a currency over which its sovereignty is not sovereign.
Examples of MS governments are USA, UK, Canada, Japan, Australia, Russia, etc. Examples of monetary non-sovereign governments are Greece, France, Italy, Illinois, California, Cook County and Chicago, which previously used their sovereign currency, and later began to use currency over which they have no sovereignty. By its own laws, MS government can give itself unlimited opportunities to create its sovereign currency and give this currency any value it chooses. For example, many states have deliberately lowered the value of their currency in order to stimulate exports.
Therefore, MS Government can never be forced into bankruptcy or any action with its sovereign currency. It can pay any debt of any size, provided that this debt is denominated in its sovereign currency. MS government does not need borrowing or taxes to service debts in its sovereign currency. However, it must apply taxation: first, to create demand for the currency and maintain its value; secondly, to afford spending without inflation. Both spending in the domestic private sector and abroad have an impact on debt and inflation. The government can have a strong influence on both these indicators, but can never fully control them. Governments usually borrow by issuing securities, government bonds and bills. Less creditworthy countries sometimes borrow money directly from a supranational organization (for example, the World Bank) or international financial institutions.
Since the government derives revenues from a significant part of the population, public debt is an indirect debt of taxpayers. Public debt can be classified as the sum of domestic debt (debt to creditors within a country) and external debt (debt to foreign creditors). Sovereign debt, as a rule, relates to public debt, which was issued in foreign currency. Another common feature for the separation of public debt is the duration to maturity. Short-term debt is usually considered to be for one year or less than a year, and long-term debt is more than ten years. Medium-term debt falls between these two boundaries. A broader definition of government debt can consider all government obligations, including future pension payments and payments for goods and services under government contracts that have not yet been paid.
During the early period of the new era, European monarchs often defaulted on their loans or arbitrarily refused to pay their debts. These cases led to the fact that financiers began to fear lending to monarchs and the finances of countries that were often at war and remained extremely unstable.
The creation of the first central bank in England — an institution intended for lending to the government — was initially advisable for William III of England to finance the war against France. He attracted a syndicate of urban traders and sellers in order to offer the sale of public debt for sale. This syndicate soon became the Bank of England, which financed the wars of the duke of Marlborough and later the imperial conquests.
The Establishment Bank Bill was developed by Charles Montague in 1694, according to a plan that was proposed by William Paterson three years earlier, but at that time no relevant measures were taken. He offered a loan of 1.2 million pounds to the government; in return, subscribers were merged into the Bank of England with long-term banking privileges, including the issuance of banknotes. The royal charter was satisfied on July 27, after the adoption of a package of laws on government tax policy (Tonnage Act, 1694).
The founding of the Bank of England revolutionized public finances and put an end to defaults, such as the Great Treasury Stop in 1672, when Charles II suspended payments on his accounts. Since then, the British government has always been able to pay off creditors' claims. In the following centuries, other countries in Europe and eventually around the world organized similar financial institutions to manage their public debt.
In 1815, at the end of the Napoleonic Wars, Britain’s national debt peaked at more than 200% of GDP.
Government bonds are bonds issued by the national government. Such bonds are often denominated in the currency of the issuing country. Government bonds are sometimes viewed as risk-free bonds, because national governments can raise taxes or cut spending until a certain point, and in extreme cases, they can “print more money” and redeem bonds at maturity. Governments of most developed countries are prohibited by law to directly print money, since this function is transferred to their central banks. However, central banks can buy government bonds to finance government spending, thereby monetizing debt.
Bonds issued by national governments in foreign currency are generally referred to as sovereign bonds. Investors in sovereign bonds denominated in foreign currencies have the additional risk that the issuer may not be able to receive foreign currency to redeem the bonds. In the case of the Greek debt crisis of 2010, for example, Greece’s debt was denominated in euros, and one of the solutions for Greece, proposed in particular by the financial economists of the World Pension Board (WPC), was to return to issuing its own currency drachma.
Governments often borrow money in a currency in which the demand for debt securities is strong. The advantage of issuing bonds in currencies such as the US dollar, pound sterling or the euro is that many investors want to invest in such bonds. Countries such as the USA, Germany, Italy and France issue bonds only in their national currency (or in euros in the case of euro members).
Relatively few investors are willing to invest in currencies that do not have a long period of stability. The disadvantage for the government of issuing bonds in foreign currency is the risk that it will not be able to receive foreign currency to pay interest or redeem bonds. In 1997 and 1998, during the Asian financial crisis, this became a serious problem when many countries could not keep their exchange rates fixed due to speculative attacks.
Lending to the national government in a country’s own sovereign currency is often considered “risk-free” and is made at the so-called “risk-free interest rate.” This is because, up to a certain point, debt and interest can be repaid by increasing tax revenues (either economic growth or increasing tax revenues), cutting costs, or, if this is not possible, simply printing more money. It is widely believed that excessive printing money leads to an increase in inflation and thereby reduces the cost of capital invested (at least for non-inflation debts). This happened many times throughout history, and a typical example of this is the Weimar Germany of the 1920s, who suffered from hyperinflation due to the inability of its government to pay the national debt arising from the costs of world war.
In practice, the market interest rate is usually different for the debts of different countries. An example is borrowing by different countries of the European Union, denominated in euros. Despite the fact that the currency is the same in each case, the market interest rate on the debts of some countries is higher than for others. This reflects the market’s views on the relative solvency of different countries and the likelihood that debt will be repaid. In addition, there are historical examples where countries declared a default, that is, refused to pay their debts, even if they had the opportunity to pay it with printed money. This is because printing money also has other negative effects that the government may perceive as more problematic than a default.
Politically unstable states are considered as the most risky, as they can stop payments at any time. Examples of this phenomenon include Spain in the 16th and 17th centuries, which annulled its public debt seven times over the course of a century and the revolutionary Russia of 1917, which refused to accept responsibility for the external debt of imperial Russia.
Another political risk is caused by external threats. It is a rarity when the winners in the war take responsibility for the national debt of the occupied state or, for an organization that, in their opinion, is rebellious. For example, all loans in the Confederation of the States of America remained unpaid after the American Civil War. On the other hand, in the modern era, the transition from dictatorship and illegitimate governments to democracy cannot automatically free the country of debt remaining from the former government. Today's highly developed global credit markets with less chance will lend to countries that deny their previous debts, or may require in punishment increased levels of interest rates that will be unacceptable to the borrower.
US Treasury bonds denominated in US dollars are often considered “risk-free” in the United States. This does not take into account the risk to foreign buyers of a change in the dollar exchange rate against the lender's currency. In addition, the risk-free status implicitly implies the stability of the US government and its ability to continue payments during any financial crisis. Lending to a national government in a currency other than its own does not give the same confidence in a given government’s ability to repay debt, but this can be offset by reducing foreign exchange risk for foreign creditors. On the other hand, government debt in foreign currency cannot be greatly reduced during hyperinflation, and this increases the credibility of the debtor. Usually small states with small economies have most of their public debt in foreign currency. For Eurozone countries, the euro is the national currency, although no state can provoke inflation by creating more currency.
Lending to regional or municipal authorities can be just as risky as a loan to a private company if the local or municipal government does not have enough power to tax. Otherwise, local authorities could pay their debts to a certain extent by increasing taxes or cutting costs, just like the national government. In addition, local government loans are sometimes guaranteed by the national government, and this reduces the risk. In some jurisdictions, interest on local or municipal bonds is exempt from taxation, which can be an important factor for the rich.
Standards for writing off public debt are established by the Bank for International Settlements, but by default they are governed by extremely complex laws that vary from jurisdiction to jurisdiction. Globally, the International Monetary Fund may take certain steps to intervene to prevent an expected default. The IMF is sometimes criticized for taking measures, advice to countries that are often associated with measures to cut government spending under the austerity regime. When analyzing the results, these measures can be viewed as a degradation of capital, on which the economy of the country ultimately depends.
These considerations do not apply to private debts, on the contrary: credit risk (or consumer credit rating) determines the interest rate, more or less, and individuals are declared bankrupt if they are not able to repay the debt. Governments need a much more complicated way to manage a default because they cannot really go bankrupt (and suddenly stop providing services to citizens), although in some cases the government can disappear, as happened in Somalia or, as can happen in the case of occupied countries where the occupier does not recognize the debts of the occupied country.
Smaller jurisdictions, such as cities, are usually guaranteed from their regional or national authorities. When New York refused to go bankrupt in the 1970s (if it was a private enterprise), by the mid-1970s, rescue was required from the state of New York and the USA. In general, such measures mean a merger of the debt of a small and large entity and give smaller subjects access to the lower interest rates that a large entity uses. A large subject may then assume some coordinated oversight in order to prevent re-occurrence of the problem.
In the dominant economic policy in general, attributed to the theories of John Maynard Keynes, sometimes called Keynesianism, there is tolerance for fairly high levels of public debt to pay for public investment in lean times, which, if boom times follow, can be paid for by increasing tax revenues.
When this theory gained worldwide popularity in 1930, many countries began to use government debt to finance large infrastructure capital projects, such as highways or large hydroelectric power plants. It was believed that this could create an effective cycle and growth of business confidence, since there will be more workers with money to spend them. Some argued that the Great Depression was indeed over due to a significant increase in military spending of the Second World War. Of course, military spending is based on the same taxes (or debt) and basic fundamentals as the rest of the national budget, so this argument slightly undermines Keynesian theory. Indeed, some then suggested that significantly higher national spending due to the war essentially confirms the basic Keynesian analysis.
However, the Keynesian scheme remained dominant, thanks in large part to Keynes’s own book, How to Pay for War, published in Great Britain in 1940. As the war was paid and won, Keynes and Harry Dexter White, Assistant Secretary of the US Treasury, had, according to John Kenneth Galbraith, the dominant influence on the Bretton Woods agreements. These agreements define policies for the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and the World Bank, the so-called Bretton Woods institutions founded in the late 1940s (the latter two, the BIS was founded in 1930). They are the dominant business entities of policy setting in relation to public debt. Due to its role in determining trade dispute policy, the World Trade Organization also has tremendous power to influence foreign exchange relations, as many countries depend on specific commodity markets for the balance of payments that they need to pay off debts.
Understanding the structure of public debt and analyzing its risks requires everyone to:
According to modern monetary theory, public debt is considered as large private capital and interest payments on debt as private income. Public debt is an expression of the budget deficit accumulated in previous years, which added financial assets to the private sector, ensuring the demand for goods and services. Proponents of this school of economic thought argue that the scale of the problem is much less serious than is commonly believed.
Global debt is of great concern, as interest payments can often place high demands on governments and individuals. This has led to calls for universal debt relief for poor countries.
Менее экстремальной и более инновационной мерой будет являться разрешение группам гражданского общества в каждой стране покупать долги в обмен на миноритарные доли в общественных организациях. Даже в условиях диктатуры, сочетание банков и власти гражданского общества может заставить провести земельную реформу и заменить правительство, так как люди и банки будут приведены в соответствие против посягательств власти.
Использование долга по отношению к ВВП является одной из самых принятых мер оценки долга нации. Например, в теории одним из критериев приема в Еврозону Европейского Союза является то, что долг страны не должен превышать 60% ВВП этой страны. Долг США в течение долгого времени документируется онлайн на веб-сайте соответствующего департамента Министерства финансов.
Суверенные долговые проблемы были одним из основных вопросов государственной политики со времен Второй мировой войны, в том числе вопрос с задолженностью по той войне, «долговой кризис» в развивающихся странах в 1980-х, потрясения от финансового кризиса 1998 года в России и дефолт Аргентины в 2001 году.
Однако не все развивающиеся страны были затронуты этой проблемой в одинаковой степени. Например, Югославия имела низкий государственный долг (возможно, потому что это было не в состоянии заимствовать на мировых рынках) до его распада и пришествия демократии, когда новые национальные правительства начали занимать деньги у МВФ. Хорватия имеет государственный долг в размере 47 млрд. долл. в настоящее время, в то время как вся Югославия (в шесть раз больше людей, чем в Хорватии) в 1980 году имела долг в размере 14 млрд. долл.
Государственный долг во многих развитых странах сопоставим с размерами их экономики. Стандартное решение для сокращения долга через профицит бюджета не представляется возможным из-за размера долга и пагубных последствиях мер жесткой экономии. Тем не менее, долг может быть устранен путем институциональных изменений. Институциональное решение основывается на присущей природе государственных ценных бумаг, который является национальным капиталом искусственно структурированным в виде «долга». С технической точки зрения это изменение правового статуса государственного долга делает его похожим на обязательства Центрального банка - то есть неоплатные по своей природе. Дискуссия в США о монете номиналом в 1 трлн. долл., которая может быть выпущена министерством финансов является еще одним примером того, что решение возможно.
«Неявным» государственным (правительственным) долгом является обещание правительством будущих платежей со стороны государства.
Обычно это относится к долгосрочным обещаниями социальных выплат, таких как пенсии и расходы на здравоохранение, а не обещаниями других расходов, таких, как образование или оборону (которые в значительной степени оплачиваются по принципу «услуга за услугу», в основном, государственным служащим и подрядчикам).
Проблема с этими неявными государственными страховыми обязательствами заключается в том, что трудно точно определить их стоимость, так как суммы будущих выплат зависят от очень многих факторов. Прежде всего, требования социального страхования не являются «открытыми» облигациями или долговыми бумагами с указанным сроком погашения, номинальной стоимостью или чистой приведенной стоимостью.
In the United States, as in most other countries, money is not allocated to the government treasury for future social insurance payments. This insurance system is called PAYGO. Alternative social insurance strategies may include a system that participates in savings accumulation and investment.
Кроме того, демографические прогнозы предсказывают, что, когда поколение «Бэби-бумеров» уже в ближайшее время начнет выходить на пенсию, работающего населения в Соединенных Штатах, и во многих других странах, будет меньше, чем сейчас, в течение многих лет в будущем. Это увеличит нагрузку на страны в плане выплат обещанных пенсий и других больших выплат, до более чем 65 процентов ВВП, которые существуют в настоящее время. «Бременем» правительства является то, что оно тратит, так как оно может платить по счетам только за счет налогов, долгов и увеличения денежной массы (государственные расходы = доходы от налогов + изменение государственных долгов перед обществом + изменение денежной массы в обращении).
In 2010, the European Commission demanded that EU member states publish their information on debts using a standardized methodology, explicitly including debts that were previously hidden in a number of ways to meet the minimum requirements at the local (national) and European (Stability and Growth Pact) level.
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World economy
Terms: World economy