Most warnings about large increases in government indebtedness revolve around future repayment obligations. For example, there is the concern that greatly increasing the government debt in the present will necessitate much higher taxes in the future. For another example, there is the concern that if the debt load is cumbersome at a time of very low-interest rates, then as interest rates rise the interest expense will come to dominate the budget and lead to an upward debt spiral as more money is borrowed to pay the interest on earlier debt. Although these concerns are valid they miss two critical points, including the main problem with government borrowing.
The first of the missed points is that there is no intention to repay the debt or even to reduce the total amount of debt. This is one way that government debt is very different to private debt. Nobody would ever lend money to a private organization unless there was a good reason to believe that the debt eventually would be repaid, but when it comes to the government the plan is for the total debt to grow indefinitely. It will grow faster during some periods than other periods, but it will always grow. Therefore, it makes no sense to agonize over how the debt will be repaid. It simply won’t be repaid or even reduced.
The current debt-based monetary system has been designed to expand…and expand…until it collapses and is replaced by something else.
Of course, the idea of debt repayment gets plenty of lip service. It has to be that way to avoid a premature collapse. The old Russian joke “we pretend to work and they pretend to pay us” springs to mind, but in this case, it’s “the government pretends to care about debt repayment and bond investors pretend to believe them”. It’s a game, and for bond investors, one of the guidelines of the game is “you’ll be fine as long as there are still plenty of people pretending to believe the government’s promise to pay”.
