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Public debt is made up of debts owed by local, state, and national governments. These debts can take many forms, such as direct loans that must be repaid and promises of services or goods that must be fulfilled. A high public debt level is often considered an economic warning sign, but it depends largely on the type of debt owed and the current economic trends within the country.
Public debt created by national government is most often known as external debt. This includes money, services, or goods owed to other governments, international organizations such as the World Bank, or to financial institutions in other countries. Most countries in the world carry a substantial amount of external debt, which can create global economic problems should a country default on its loans. In cases where default on external debt is imminent, governments and international organizations often work together to create a sustainable solution, in order to prevent damage to the entire economic spectrum.
Internal debt is another major component that makes up public debt. This refers to any money or services owed to individuals, businesses, or financial institutions within the country. Internal debt is more often created by state or municipal governments, since they generally do not have the power to negotiate with other nations. Internal debt may include bonds and securities, which are issued to investors with a guaranteed return at maturity in order to raise government revenues in the short term. Other forms of internal debt may include government contracts, such as those for construction or defense, and the payment of pension programs such as veteran's benefits or Social Security.
Both internal and external debt may be created on a short- or long-term basis. Short-term public debt must be paid off in a period of months or a few years, while long-term debt may have decades before it enters repayment. The division between short and long term debt is important when measuring the debt sustainability of a country: a nation may be well able to pay off its currently due loans, but appear to be in serious financial trouble if all long-term debts are also considered.
Public debt is usually created through deficit spending. This practice allows governments to spend more than they make over a period of time, often in order to stimulate the economy. While some deficit spending may be necessary and manageable, many economists warn against raising the level of public debt too frequently. Should a serious disaster occur, countries with extremely high debt levels may be in danger of falling into default, which can cause severe economic consequences for years to come.
@KoiwiGal - That's why I think that economics should be compulsory in schools and that kids should be taught how their government works, particularly in regard to spending money. If they know that the money has to come from somewhere they will be better citizens and make better decisions when it comes to voting.
Not that one politician is all that much more use than another, but if more people understood how it all works then maybe we could start weeding out the really bad ones.
That's assuming, of course, that it's possible to really teach kids how this all works. I feel like I understand it better than the average person, but I still don't really get it at all.
@Mor - Well, to some extent it's their own fault. It wasn't just the government that was spending all that money. The people of Greece were living it up big time, taking out loans and not paying them back and so forth.
The same thing happened in Ireland when they had their boom. You can't just decide to make university free and give universal health care and so forth without getting the money from somewhere. There are countries that do it, but they tax their residents of about half their income for the privilege. I'm not saying that's the best way to live or not. It's just a choice you make.
You can't make the choice to have all the benefits
with none of the shortcomings. It's just like personal debt on an individual level. If you don't pay it back, you're going to have to deal with the consequences. The only ones who don't are countries like some of the Arab states that have so much wealth from petrol they are like kids with trust funds.
What happened to Greece around 2011/2012 is such a tragedy and it basically happened because of this kind of debt. People didn't realize that their government was spending like there was no tomorrow and borrowing like crazy, so when it came due, there was simply no money left to pay the humongous debts. I guess people don't really think about what their governments owe other governments at all. But it seems like almost every government in the world owes a fair amount to all the other governments.
And it's not like they can wave their hands and make the debts go away, or declare bankruptcy or anything like that. If they don't pay on time, then they'll be left with
nothing, no credit, no possibility of getting more and no money for their people.
It's a very hard place to be in and I hope that other countries will learn from the experiences of Greece, but unfortunately I don't think they will.
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