Public Debt Issues
Public debt has been major political and social issue in the U.S. and most of the rest of the world for several decades. An intense focus on public debt, particularly sovereign or national debt, began after World War II, when many nations had accumulated large debts because of the war. Whether to take on public debt, how much and how to repay it are the three main axes of the public debt equation, and those are public policy issues that are debated by politicians and economists in nearly all countries.
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Public Debt Historically
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While the historical record is certainly full of references to moneylenders and rich merchants loaning kings and emperors monies for their wars or other projects, the idea of public debt did not really develop until the 19th century when governments of European countries began making formal written arrangements with banks to borrow money for various purposes. Over the years quite a few nations have defaulted on their sovereign debt for many different reasons, and in most cases bondholders got back little to nothing for their investment.
Public Debt Today
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Public debt today is at an all-time high. The Great Recession has forced many governments to borrow substantially for stimulus packages and to pay previously agreed obligations while their tax revenues have dropped substantially due to reduced economic activity. This has resulted in many governments running large deficits the last few years and dramatically increasing public debt worldwide. Some countries in Europe and elsewhere have had to restructure obligations and borrow from supranational financial institutions to stay solvent. Many European nations made significant budget cuts, however, beginning in 2009, and the trend is continuing in 2010 and beyond, as they try to reduce their deficits and balance their budgets.
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Public Debt and Means of Borrowing
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Governments today issue public debt through a number of means, but historically the main means of funding public debt has been the issuance of bonds. Governments issue bonds that have a specific maturity (usually 2 to 30 years) and pay interest throughout that period. Bonds are traded in financial markets like stocks, and countries that are perceived as higher risk of default have to pay a higher interest rate to entice investors to buy their bonds (to compensate investors for the risk).
Theoretical Implications of Public Debt
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Economists have studied public debt and the effect it has on economies and societies for many years, and while the cause and effect relationships are extremely complex, it is fair to say that there is a reasonably direct relationship between the size of public debt (relative to economy) and the strength of a nation's currency (high debt ration means a weak currency). The relationship between inflation and public debt is also multivariate, but many economists note that inflation typically follows periods of large public debt issuance, simultaneously reducing the value of bondholders invested capital and making it easier for governments to repay the debt.
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