A few people have asked why don’t government’s just default and not pay their debt back?
Firstly, a government could effectively default just by printing money, creating inflation and making it easier to pay debt back. But, if the government does create inflation (print money) to pay off its debt or simply refuses to pay, there are real problems.
Debt Defaulter If a government defaults on its debts, who is going to lend it money in the future? Once you get a reputation as being a defaulter, it will be very difficult to encourage people to buy your bonds again. That means the government will not be able to borrow in the future. Or if it does borrow more money then it will have to pay a much higher interest on the debt.
Reduction in Living Standards. Weimar Germany in the 1920s and Zimbabwe in 2008, both had high levels of government debt which led to hyperinflation. But, this kind of inflation destabilises the economy. Money becomes worthless and people resort to a barter economy. This kind of inflation damages economic activity.
Reduction in Value of Currency. If you default on your debt, there will be a sell off of your currency. This will make imports more expensive and reduce living standards.
Confidence in Single Currency
In a single currency, the default of one nation, would damage the exchange rate for all member states. If one country defaulted, markets would lose confidence in other countries will similar situations. It would become more difficult and more expensive for all member countries to borrow.
Note: In a period of deflation, it is possible for a Central Bank to pursue quantitative easing (creating money) without causing inflation. To some extent, in certain circumstances, a government may be able to create money to buy a proportion of its debt. But, to completely default on your debt would create many problems, and you would probably never be able to borrow again.
Related
Would you say this holds true for Argentina? From what I can see, after several years since defaulting on their debt, they are better off than they were before defaulting on their debt. They suffered about five years of crisis and hardship and then gradually benefited from that default to end up in a better place today. Putting aside external relations, hasn’t it been in Argentina’s national interest to default on their debt?
http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999%E2%80%932002)
I’m doubtful about the above claim that the devaluation required consequent to a bout of inflation reduces living standards. Clearly a serious bout of inflation DOES reduce living standards, but the devaluation itself does not. Devaluation is simply a recognition of the new reality, namely that the currency of the country concerned is worth much less than it used to be.
It’s a bit like if one halves the number of hours worked per week. The consequent halving one’s pay hardly a big surprise. Can any employer really be expected not to halve someone’s pay in these circumstances?
There is an article here in the Financial Times claiming it is almost impossible to cheat creditors by inflating away debt: reason being that creditors immediately see what is going on when the inflation starts and demand higher rates of interest to compensate.
http://ftalphaville.ft.com/blog/2009/08/04/65156/the-debt-inflation-myth-debunked-by-ubs/
I am much in favour of governments defaulting on what they owe to private finnancial institutions (as opposed to other governments). This would be in line with the ideas fueling the current OCCUPY THE WALLSTREET movement. I would very much like someone to comment if this is at all possible and practical. Would that help to stop the 1% living off the fat of the … USURY (shameless and gotten out of hand)?