My boyfriend tells me that it’s a fallacy to evaluate a country’s financial activities in the same way that is prudent for an individual’s or a business’. Specifically he said that there is no limit to how big the public debt:GDP ratio can be while still having a healthy economy. I don’t remember his exact argument, but it had something to do with reducing the real debt with inflation and other monetary policies. On the face of it this seems like some kind of Ponzi scheme, but I know less about economics that he does, and I also may be misremembering his point. Does anyone have a link to a good explanation of how (or whether) good financial management at a country level differs from at a personal level?
Well, it’s complicated. But let me point out three big differences which should be enough to start you thinking about things.
First, goals. Financial management at the personal level has the goal of having (at some point in the future) more money. Sovereign governments generally don’t have a goal of more money in the future. Their goals are multiple and varied ranging from “stay in power for another year” to “help the economy produce the most it can”.
Second, money. Countries usually can print their own money (a big exception: the eurozone) and a household cannot. The personal equivalent would be the ability to write “$10” on a piece of paper and have the store accept that piece of paper and give you $10 worth of goods in exchange.
Third, income. Countries can, within reason, decide what their income (aka taxes) would be. The household equivalent would be for you to tell your job “This year I want to be paid $X” and have it happen, just so.
Given all this, I am not at all sure that there is no limit to the debt/GDP ratio. I rather suspect that as that ratio grows, bad things become more likely (this has mostly to do with public expectations). Of course, even if household finances are the wrong metaphor, that claim is not in any way an argument for large debt/GDP ratios.
Steven Landsberg often writes about this very topic
Summary: Either the debt is paid for by taxes in the future or now; because we can save money, it doesn’t make any difference. The problem is the level of spending (which affects how much must be paid) not the debt (which merely affects when it must be paid).
My boyfriend tells me that it’s a fallacy to evaluate a country’s financial activities in the same way that is prudent for an individual’s or a business’. Specifically he said that there is no limit to how big the public debt:GDP ratio can be while still having a healthy economy. I don’t remember his exact argument, but it had something to do with reducing the real debt with inflation and other monetary policies. On the face of it this seems like some kind of Ponzi scheme, but I know less about economics that he does, and I also may be misremembering his point. Does anyone have a link to a good explanation of how (or whether) good financial management at a country level differs from at a personal level?
Well, it’s complicated. But let me point out three big differences which should be enough to start you thinking about things.
First, goals. Financial management at the personal level has the goal of having (at some point in the future) more money. Sovereign governments generally don’t have a goal of more money in the future. Their goals are multiple and varied ranging from “stay in power for another year” to “help the economy produce the most it can”.
Second, money. Countries usually can print their own money (a big exception: the eurozone) and a household cannot. The personal equivalent would be the ability to write “$10” on a piece of paper and have the store accept that piece of paper and give you $10 worth of goods in exchange.
Third, income. Countries can, within reason, decide what their income (aka taxes) would be. The household equivalent would be for you to tell your job “This year I want to be paid $X” and have it happen, just so.
Given all this, I am not at all sure that there is no limit to the debt/GDP ratio. I rather suspect that as that ratio grows, bad things become more likely (this has mostly to do with public expectations). Of course, even if household finances are the wrong metaphor, that claim is not in any way an argument for large debt/GDP ratios.
Steven Landsberg often writes about this very topic
Summary: Either the debt is paid for by taxes in the future or now; because we can save money, it doesn’t make any difference. The problem is the level of spending (which affects how much must be paid) not the debt (which merely affects when it must be paid).