Could high global government debt cause a crash?

[Deleted User]

Japan and China have debt of over 200% to gdp.
USA's debt rapidly on the rise.

Is anyone else worried that this could cause a massive crash? I don't see how the government can ever repay that debt, it's too big.

Alexland

newbinvestor wrote: »

I don't see how the government can ever repay that debt, it's too big.

Why would they ever need to repay the debt? The main question is if they can service the interest payments which are often set below inflation causing a soft default on the spending power of the original loan. Government debt serves useful purposes such as the bonds that pension schemes require to provide stable incomes in retirement.

Alex

Seabee42

Logically at some point, the interest payments will restrict government spending. It is common for governments to spend more than they receive (invest) effectively spending more on the generation electing them and meaning less to spend tomorrow not least due to the interest. At some point this usually entails a default which will mean lower government spending (i.e. they can usually only spend what they actually raise in taxes).

DragonQ

High government debt just means more money is going into the private sector from the public sector than the other way around. It's not an issue unless it gets incredibly unsustainable (we're nowhere near this yet) or interest rates get out of control (which shouldn't happen since governments generally control monetary policy).

seacaitch

newbinvestor wrote: »

Japan and China have debt of over 200% to gdp.
USA's debt rapidly on the rise.

Is anyone else worried that this could cause a massive crash? I don't see how the government can ever repay that debt, it's too big.

As a newb investor, you'll have plenty of things to consider, but long term global macro isn't one of them.

--

There have been very high levels of govt debt at other times in history and the world didn't end. Expect to see a continuation of financially repressive monetary policy, pinning interest rates below inflation for the foreseeable future, and as necessary the restarting and extending of QE programs to take more govt debt onto central bank balance sheets (reducing govt debt interest burden) and eventually cancellation (debt monetisation). Whatever is required. That backdrop means that having equity and real asset exposure over the long term (vs. cash) is probably essential, even if the ride gets bumpy on occasions.

spadoosh

It depends what the debts are actually paying for.

Consider it on a personal level. Mortgage debt not considered bad because investment argument, need a house etc etc. If the debt was caused by paying for food, theres a much bigger problem at play.

I cant picture China having a huge welfare state. So youd imagine a lot of theirs is investment debts, less bad. Where as Japan, they do spend a bit on welfare, theyve had an expensive few years so their debt is probably a lot more mixed, so some recovery, some day to day spending and some investment. Quite a bit more risky as the returns, youd expect, would be less. And then Japan have the very real problem of a declining population, lower tax reciepts expected in future and and ageing population will increase the burden on welfare.

This kind of crash can only be properly triggered by a failure to pay. Most people want to avoid such a crash as its in very few people interests to have one. As such expect a lot of flexibility in repayment terms or having things renegotiated should it need be.

Boom and bust is an inevitable part of the economic cycle. So there will certainly be global peaks and troughs, crash can mean the last global financial crisis where it was mainly a load of computer numbers getting deleted. Or can be like the wall street crash, where people use money to wallpaper their house. Theyre usually kick started by a particularly large default somewhere in the chain. In the GFC it was private companies being defaulted on by their customers due to bad lending practices that started the ball rolling.

Malthusian

Seabee42 wrote: »

It is common for governments to spend more than they receive (invest) effectively spending more on the generation electing them and meaning less to spend tomorrow not least due to the interest.

Although this is true, there is usually more to spend tomorrow, despite the burden of paying off the previous generation's borrowings, thanks to economic growth. They are just less better off than they would be if the previous generation hadn't borrowed money from them.

And in any case the next generation will also borrow money from the generation to come after them, so there is even less reason they should resent the debt the previous generation loaded on them.

At some point this usually entails a default which will mean lower government spending (i.e. they can usually only spend what they actually raise in taxes).

Not true. Government defaults are rare. What usually happens is that the next generation just pays the debt.

As long as the economy continues to grow, there is no problem with higher debt.

SonOf

Look at who owns most of Japanese debt. You cannot compare Japan to most other countries.

Seabee42

Malthusian wrote: »

Although this is true, there is usually more to spend tomorrow, despite the burden of paying off the previous generation's borrowings, thanks to economic growth. They are just less better off than they would be if the previous generation hadn't borrowed money from them.

And in any case the next generation will also borrow money from the generation to come after them, so there is even less reason they should resent the debt the previous generation loaded on them.

Not true. Government defaults are rare. What usually happens is that the next generation just pays the debt.


The next generation pays the interest for sure not sure the debt will be paid.

As long as the economy continues to grow, there is no problem with higher debt.

There is not relatively more and in the UK case this is largely based on immigration so the question is is their more per person? On a bigger note though with global warming is perpetual growth even possible?

Filo25

If you start getting a run on government debt, just expand the QE programme and equivalents worldwide, I wouldn't be surprised if a lot of QE debt eventually just disappeared, a great way of effectively printing your way out of trouble.......

System

Malthusian wrote: »

As long as the economy continues to grow, there is no problem with higher debt.

However, countries with higher debt might have lower growth:
https://en.wikipedia.org/wiki/Growth_in_a_Time_of_Debt
Although, not everyone agrees with Reinhart-Rogoff article.