Government Debt - The Elephant in the RoomAnyone who has mortgage or business people who borrow from a bank know that they need to pledge assets as security against the loan and pay interest to the bank on the amount borrowed. As long as the loan is on an appreciating asset, one can argue that the loan is a win win for the bank and also for the person or firm taking out the loan. This is called leverage. Loans to buy depreciating assets are a different kettle of fish and as a general rule are considered bad loans.
Typically either in the case of mortgages or business loans there are covenants with the lending institution which limits the amount of leverage which in turn provides some sort of fiscal prudence.
As a general rule such loans contribute to overall growth in total assets or at least their value and as such increase the overall wealth in the economy. One can question the distribution of this wealth and the equality of this wealth, but in general the total over time increases.
But what about Government debt?
As a general rule most of the developed countries in the world have a Central Bank which has the authority to print as much money as it desires out of thin air. Governments borrow from these Central Banks but these loans have characteriztics that are different from a mortgage or business loan....
1.....there are no repayment covenants or borrowing limits
2...the loans are interest free in that any interest payments the Government makes on the loans are returned to the Government
3....the loans are generally used to pay for depreciating assets and as such have limited value in terms of increasing the wealth and growth of the country over the longer term
Thr end result of this is that excessive borrowing by Government makes money meaningless and the more meaningless money becomes the more inflation there is. At the same time that Governments have become addicted to this free money from their Central Banks they are cognizant of the potential for inflation. To correct for their "sins", Government over time have changed the definition of inflation and introduced measures to reduce the published inflation numbers compared to the actual inflation.
What is the effect of all this?
In its simplest terms it makes the rich richer and the poor poorer. We can see a direct correlation between the expansion of Government borrowing from their Central Banks over the past few decades and the increasing skewness of the income distribution in favour of the rich. So for example in the US the top 20% in terms of income own about 80% of all of the assets in the country.
So what's wrong with that?
Setting aside all the moral and social aspects of this and just talking economics, there some fundamental structural problems with this result. As the rich get richer, a greater proportion of their wealth is held in assets which do not contribute to economic activity and actually become a drain or impediment to growth and this is not a good thing. In fact what happens is that it forces government to actually spend more on income distribution to address the needs of the poor and this in turns results even higher borrowing from the Central banks and in turn just makes the situation worse. Biden's multi trillion dollar Build Back Better proposal is a good example of this.
What history has shown over thousands of years, is that an economy built like this without a solid and sensible foundation fails and often because of a revolution lead by the disadvantaged and ultimately leads to a destruction of the asset valuations in the country.
As the kids would say on a car trip - "Are we there yet?"
My assessment is not yet but we are getting close to this point.