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1939 Democrat Dollar Arthur C. Brunk Satirical Anti FDR Token REV
Kimberly Amadeo from thebalance dot com wrote:
The public debt is how much a country owes to lenders outside of itself. These can include individuals, businesses, and even other governments. The term "public debt" is often used interchangeably with the term sovereign debt.
Public debt usually only refers to national debt. Some countries also include the debt owed by states, provinces, and municipalities. Therefore, be careful when comparing public debt between countries to make sure the definitions are the same.
Regardless of what it's called, public debt is the accumulation of annual budget deficits. It's the result of years of government leaders spending more than they take in via tax revenues. A nation's deficit affects its debt and vice-versa.
The public debt is the amount of money that a government owes to outside debtors.
Public debt allows governments to raise funds to grow their economy or pay for services.
Politicians prefer to raise public debt rather than raise taxes.
When public debt reaches 77% of GDP or higher, the debt begins to slow growth.
Public Debt Versus External Debt
Don't confuse public debt with external debt.
That's the amount owed to foreign investors by both the government and the private sector. Public debt does impact external debt. If interest rates go up on the public debt, they will also rise for all private debt. That's one reason most businesses pressure their governments to keep public debt within a reasonable range.
When Public Debt Is Good
In the short run, public debt is a good way for countries to get extra funds to invest in the ir economic growth. Public debt is a safe way for foreigners to invest in a country's growth by buying government bonds.
This is much safer than foreign direct investment. That's when foreigners purchase at least a 10% interest in the country's companies, businesses, or real estate.
It's also less risky than investing in the country's public companies via its stock market. Public debt is attractive to risk-averse investors since it is backed by the government itself.
When used correctly, public debt improves the standard of living in a country. It allows the government to build new roads and bridges, improve education and job training, and provide pensions. This spurs citizens to spend more now instead of saving for retirement. This spending by private citizens further boosts economic growth.
When Public Debt Is Bad
Governments tend to take on too much debt because the benefits make them popular with voters. Increasing the debt allows government leaders to increase spending without raising taxes. Investors usually measure the level of risk by comparing debt to a country's total economic output, known as gross domestic product (GDP). The debt-to-GDP ratio gives an indication of how likely the country can pay off its debt.
Investors usually don't become concerned until the debt-to-GDP ratio reaches a critical level.
When debt approaches a critical level, investors usually start demanding a higher interest rate. They want more return for the greater risk. If the country keeps spending, then its bonds may receive a lower S&P rating. This indicates how likely it is that the country will default on its debt.
As interest rates rise, it becomes more expensive for a country to refinance its existing debt. In time, income has to go toward debt repayment, and less toward government services. Much like what occurred in Europe, a scenario like this could lead to a sovereign debt crisis.