A few weeks ago, my sister delved into the “print more money” argument.
I had no legitimate answer as to why, in practice, this does not work.
It went down the rabbit hole.
My delayed response has been elaborate, to say the least.
This is my third week discussing and researching economics. In other words, this is day 21 of my personal version of hell. Throw in a Jewish grandmother who can’t stop touching your face, the sound of someone chewing macaroni and cheese, a screaming baby, and the early 2000s nightmare that was Axel F’s song “Crazy Frog” – and I might just give up on it all.
But we are nearing the end of the road – or whatever other sport analogy would work here that I don’t understand (we are in the last inning? we are at the 10-yard line? I literally don’t even know what sport those words correlate with). In any case, for my sister, all my cute readers, and the mere fact that there has been no Jewish grandmother, mac and cheese chewing, screaming baby, or “Crazy Frog” in my vicinity as of late, I have chosen to persevere.
To understand why we can’t, in my sister’s words, “just cancel the debt” and say “hey girl, no worries, you don’t owe me money anymore” …
We need to understand who the government is indebted to.
Primarily:
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Foreign countries:
You’ve probably heard people in the American public say, “we owe China” or something else vaguely racist sounding at some point (or blatantly racist, it is, after all, the American public I am talking about). This just means that foreign entities (or their banks) have bought up another country’s bonds and T-bills. This debt is also affected by trade imbalances. I will not get into this because I do not fully understand, nor care to understand. It is complex. If anyone is feeling deeply curious, email me. (But actually don’t) (maybe email Tk@equity.guru). -
Any debt holders:
This is the debt held by the Canadian public (or anyone else who owns any of our T-whatchamacallits). If you did not read my last article, go read it. If you are refusing to click on that link, T-whatchamacallits refer to T-notes, T-bills and T-bonds.
These are fixed-rate government debt securities issued by the federal government.
In human words: you buy up the government’s debt to help them out and later, get your money back, plus interest.
Why can’t we “cancel” it?
If you ask a friend to spot you some money for dinner, you can’t go back to your apartment where your wallet is sitting, full of cash, and decide – I’m not paying you back. Well, you could. But then you just suck.
In terms of country, “cancelling debt” is called “defaulting”. Though not common, countries can, and periodically do, default on their sovereign debt. Again, I spoke about this last week, but if you’re not keen to click about, sovereign debt (aka, government debt, national debt, public debt) is the financial liability of the government of a sovereign nation to its foreign and domestic creditors. Basically, it is the value of outstanding bonds issued by that country’s government (aka, the amount the government must pay back to the people/companies/countries that bought up their bonds).
Defaulting happens when the government is either unable or unwilling to make good on its fiscal promises to repay its bondholders.
Just as an individual who misses their credit card payments will have a harder time finding affordable loans, countries that default experience substantially higher borrowing costs. In general, nations with higher credit ratings (yes, nations too have credit ratings based upon their financial and political outlook) enjoy lower interest rates and thus cheaper borrowing costs.
Meaning, again, human words: the debt of emerging or developing countries carries greater risk than that of, say, the USA. If I were to buy bonds from a struggling country (which is just to buy up the debt), I have less certainty that they will pay me back. Because of this risk, I say: I’ll give you my money, but I want higher interest on it. If I’m buying American bonds, the interest rate can be lower since I am guaranteed (for all intents and purposes) that I will be repaid in full.
So, when a developing country needs to raise money, it costs them more to borrow because the interest rates will be higher. I know, seems counterintuitive and entirely unfair, but that is the way of the world.
What happens if they do, in fact, default? (i.e., “cancel” it):
When a country does default, it can take years to recover.
Take Argentina for example, a country that missed their bond payments beginning in 2001.
By 2012, the interest rate on its bonds was still more than 12 percentage points higher than that of U.S. Treasuries. If a country has defaulted even once, it becomes harder to borrow in the future, (so low-income countries are particularly at risk – see? The wealthy always seem to win no matter the discussion point).
The biggest concern about a defaulting, however, is the impact on the broader economy.
In the US, for instance, many mortgages and student loans are pegged to Treasury rates (our T-whatchamacallits). If borrowers were to experience dramatically higher payments as the result of a debt default, there would be substantially less disposable income to spend on goods and services, thus slowing the economy, thus entering a period of depression, etc., etc.
Since fear of contagion can spread to other economies, countries with close ties – particularly those that own much of the country’s debt – will sometimes step in to avert an outright default. (This happened in the wake of the 2008 global financial crisis – the International Monetary Fund, European Union, and European Central Bank, came together to provide Greece with much-needed liquidity and credit stabilization. How cute!)
Over it.
The end, goodbye.
S: I spent three quarters of a month on this. Please tell me you understand. If not – I love you, but you’re a lost cause.
Until next week when I will talk about anything but economics.