As a consequence, they can’t borrow easily: Investors won’t be willing to lend them that much for fear of future default.īut the debt of countries with strong institutions and independent central banks-like the U.S. Here's an excerpt of that conversation.Ĭountries that are not politically stable and don’t have independent central banks are not going to have very credible institutions, Faria-e-Castro said. Why Independent Central Banks Matterįaria-e-Castro explained why independent central banks make a difference to a country's borrowing. Economists usually consider monthly inflation rates of above 50% as hyperinflation episodes, as noted in a 2018 On the Economy blog post. Hyperinflation is excessive inflation, with very rapid and out of control general price increases. That erases the value of the debt-a “soft default”-but it also typically kicks off hyperinflation, Faria-e-Castro said. In a country where the central bank is not an independent authority, the central bank can be pressured more easily by politicians to start printing money to pay for the country’s debt, he said.īut the flow of new money will invariably lead to high inflation in that country. “The president of Country X can call the governor of the central bank and say, ‘OK, you have to print money to pay for this debt,’” Faria-e-Castro said. There are other ways to default, some of them “kind of sneaky,” Faria-e-Castro said.
Lenders will be less willing to lend to them and will charge higher interest rates.
“That’s an outright hard default.”īut countries that take that action will have trouble borrowing again. “One day, the president of Country X can just organize a press conference and just tell people, ‘OK. Investors-many of them international-buy that debt and then want to be repaid. Say the government of “Country X” borrows money to cover its deficits, Faria-e-Castro said. Investors in some countries’ debt may be concerned about the potential for default. But if a country’s economy is slowing and economic growth rates are lower than they used to be, “this starts becoming a more divisive issue.” Investors in Some Countries’ Debt Worry about Default That’s fine if a country’s economy is growing, because you know that the next generation will, on average, be better off than the current one, and likely able to pay a little more in taxes to decrease the debt, Faria-e-Castro said. The total national debt is an accumulation of federal deficits over time, minus any repayments of debt, among other factors.Ī big consequence of deficit spending is that the fiscal burden shifts from one generation to the next, Faria-e-Castro said. The government mostly borrows money to make up the difference. When federal spending exceeds revenue, the difference is a deficit. Why Economic Growth Rates Affect Views on Deficit Spendingĭeficit spending means that a government is choosing not to raise taxes today to pay for that spending but is choosing to wait until tomorrow, Faria-e-Castro said. The level of interest rates on the debt.Whether a country has strong institutions, an independent central bank and independent monetary policy.He said the answer to the question of “how much debt is too much for a country” partly depends on three factors: You can hear part of the conversation in the embedded audio. In his research, Faria-e-Castro explores big questions about the economy, so we asked him about this issue last year. He discussed national debt in an interview last year.
Department of Treasury.Įconomist Miguel Faria-e-Castro’s research focuses include macroeconomics and fiscal and monetary policy. Louis Fed Economist Miguel Faria-e-Castro.īy comparing the total federal debt to the size of a country’s economy, we can see how the government can use the resources at hand to finance the debt, according to Your Guide to America’s Finances from the U.S. By comparison, Japan’s ratio at the end of 2019 was higher: about 200%, according to data from the Bank of Japan and Japan’s Ministry of Foreign Affairs and calculations by St. federal debt-to-GDP ratio was 107% late last year, and it went up to nearly 136% in the second quarter of 2020 with the passage of a coronavirus relief package. ( GDP serves as a measure of an economy’s overall size and health, measuring the total market value of all of a country’s goods and services produced in a given year.) One way to gauge the size of a country’s national debt is to compare it with the size of its economy-the ratio of debt to GDP. How much federal debt is too much? Is there a tipping point at which it becomes a big problem for a country?
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