Reply To: Why is government debt bad?


If the government accumulates debt, it has to borrow money. The resources that are used to finance government spending are dragged from the private productive sector into the public sector. These resources cannot be used to finance private investment which is a lot better for the economy than government spending. Moreover, if the government borrows a lot of money, there’s less money available to be loaned out to private individuals and companies which leads to higher interest rates which makes private investment less profitable.

If the government monetizes the debt, the debt is payed by new money created by the Central Bank (in the US the FED). In that case, the money supply increases, the value of the currency falls, prices rise etc. The interest rates might be forced down and trigger an unsustainable boom.

The government might default on it but then spending has to be cut dramatically because nobody will lend money to the government in the future. So entitlements would have to be cut and austerity measures implemented.
If it is payed back, then the government will have to collect more taxes in the future which sucks more resources out of the private sector.