How do we pay off debts?

Greece, Spain, Portugal or Italy. The countries in question, the countries that have problems with their debt. Few people are already looking at the United Kingdom, which now has the second highest deficit in the EU, Belgium, France or Germany. All EU countries, all eurozone countries have a problem with public budgets, they fall into debt. What with this? Who will pay off these debts and how? And when?

European central bank
European central bank

Almost the entire twentieth century has seen one phenomenon in the vast majority of the world - public spending is growing and growing at a high rate. For example, in 1960, the share of public expenditure in GDP in Germany was 32,4%. In 1994, it was already 49% - at the same level it is de facto to this day.

A beautiful example is Great Britain. In 1999, public expenditure accounted for 38,9% of GDP, while public debt accounted for 46,8% of GDP. In 2009, public expenditure increased to 51,7%, while debt increased to 68,1% of GDP. While public spending increased by about 13%, debt increased by about 22%. A deficit is expected this year 11,5% of GDP.

However, debts have to be repaid, the situation is becoming risky, because debts are becoming more expensive. Interest rates are rising, that means the only thing - lending to states is becoming riskier, ie markets expect problems in public spending. Of course, states are aware of this. A i States are an interest groupwho can lobby.

International Monetary Fund he recently issued a recommendation recommending that the inflation target be raised to 3 to 4 percent. What does it mean?

Inflation as debt repayment

Imagine lending someone 1 crowns a year with 000% annual interest. The debtor should therefore return 000 crowns per year. Theoretically, you should be 3 plus, right? But lo and behold - a third person enters this seemingly simple problem. You won't hide from her, he is everywhere. He sees everything, hears everything, and in fact it affects everything. His name is inflation.

You ask, "What the hell is inflation"? Inflation is devaluation of money. In other words, if you can buy 10 rolls for 10 crowns today (I know you can't, but let's face it, hypothetically you can) and for the same 10 crowns you can buy only 5 rolls, ie only half the amount of what a year ago, and if this phenomenon can be observed "everywhere", then inflation has ranked here for that year - not just any, but straight 100%.

But back to our loan. We lent one million crowns a year with 3% interest. Suppose that the Czech National Bank, which, like all other central banks in the world, is very influential levers on inflation, will follow the recommendations of the International Monetary Fund, and inflation will "succeed" by 4% during that year.

What does this mean for you, as a creditor? You have lent 1 million crowns at 3% interest pa, but the money that the borrower returns to you is burdened by annual inflation of 4%. Inflation is actually a "negative interest rate". So - nominally, your debtor would return you 1, but "thanks" to 030% inflation would really return something around 990 crowns. So on the loan you would - despite that interest - he suffered. But that's not all.

4% inflation means that in addition to raising prices by 4%, people's incomes also rose by 4%. So your debtor also has at least 4% more income. What does it mean? Inflation has become a means of redistribution - she took the money from you, she gave it to the debtor.

Inflation redistributes money from those to whom it is owed to those who owe. Let's go back a few lines above, to the IMF. The International Monetary Fund recently issued a recommendation recommending that the inflation target be raised to 3 to 4 percent. What does it mean?

States are heavily indebted in the current crisis and are beginning to pay extra for the fact that almost no state in the world has any reserves of its own (although, for example, in the Czech Republic, private companies must have them). Debt repayment is becoming a problem and states often do not know what to do with it. Reduce spending, downsize social systems and layoffs? Raise taxes? It hurts, it can be seen, or it is also counterproductive. And there is a much more elegant solution -  debt monetization!

What is such an inconspicuous monetization? The central bank will simply start buying government bonds, for which it will pay with newly printed money. In order to give new money to the state as cheaply as possible, the central bank also usually lowers interest rates. The amount of money in circulation is increasing and at the same time demand is being massaged. There is inflation. Of course, everyone's savings will be devalued, of course, we will all lose money on retirement. Of course, inflationary noise will increase, markets will be disrupted… but it is not so visible. Only those who understand the issue will see it. Go outside, somewhere in the square, and ask people if they know what inflation or debt monetization is.

Debt monetization will not take place tomorrow or next year. It will take longer to be as unobtrusive as possible. About 10 or twenty years. But it will happen. It happens. The European Central Bank will not withstand political pressure.

Debt Harms Twice - Free lunch fiction

However, the monetization that impoverishes us all, because we all pay my debts, is not the only effect that harms the national debt. Imagine that the government is under pressure from public opinion - social benefits (such as maternity benefits) are too low!

The government resists at first, it does not want to increase because it does not have the money. However, it will subsequently succumb to pressure from the majority of the public and increase social spending. But where does he get the money for it? It can raise taxes - but people wouldn't like that, that is visible. Then he will solve it differently - will borrow.

The government will offer its bonds on the market. He's in the situation at the moment banks.

Bank The first commercial it has two options before whom to lend. The first option is to lend 500 million to Mr Novák, who needs it expand its production capacityHe's doing well, has a detailed application for the bank. The bank could provide investment Mr. Novák, investment would probably earn and the bank would get its money back + interest.

The second option is to lend those 500 million to the state. The state is not succeeding like Mr. Novák. The state will spend them on social spending, of which apparently no profit not. Sure, you can argue that higher social spending will support demand (this is called the multiplier effect, more details about it in the future), but the problem is that for the state this "multiplier effect" is not coming.

Mr. Novák's factory would give people work, she would earn, she would secure contracts for various companies - must ensure the construction of a production hall, purchase / rental of machines, people's salaries, the purchase of materials, the payment of energy, must pay taxes je obviously is investment Mr. Novák more advantageous. So who will the bank lend to?

Lend to the state. Why? Because the state has something that Mr. Novák cannot compete with - the state controls the law, the state controls taxes. If investment Mr. Novák did not succeed, the bank would lose the money. If "investment State "have not succeeded, few will notice and the bank will still get its money back to some extent.

Mr. Novák could expand the company, cover a larger part of the market, invest in innovation, improve technology, pay managers, employees, pay suppliers, buy machines… but not. Can not. Because of the national debt. That is calleddisplacing effect - The "state" has pushed out the better investment Mr. Novák. The more states borrow, the greater the crowding-out effect, with money drowning in rampant bureaucracy and bad investments instead of investing money in projects that have a future.

If the bank does not want to lend to a private project, it means that the private project would probably be bad investment. Poorly investment they are dangerous for the economy, even if they make money, so they are very fragile and, in the event of problems, they are just bad investmentthat trigger all sorts of crises. However, the same thing investment lends - it is a "investment fog", when the state invests poorly and no one prevents it. The private sector may be as cautious as it wants at the time, but they will still be bad here investment state, which will sweep us all into trouble.

Do you already know how and who will pay off debts? Yes, we will we all and it will help impoverishment of us all. And that's pretty cool, isn't it?