Hungry Billionaires
In primary school, I had an incredible history teacher, whose teaching was not full of dull facts, but amazing stories about the past. What is more, he then showed us, how are consequences of these past events seen even today. Nevertheless, that is the point of history class – not to memorize tons of data about what happened, but to learn about the mistakes people made and make sure we, in presence, do not repeat them ourselves. One day, we were learning about a certain war (I do not remember which one exactly) and the teacher explained how some countries spent an unbelievable amount of money on an army and their equipment. Moreover, he opened a tab in Google and searched for a special “debt-meter” that has been measuring how much debt different countries have every second.
The whole class was mind-blown. In fact, a vast majority of countries worldwide are indebted for billions, or even trillions of dollars, which sums up to approximately 79 trillion (79,000,000,000,000) dollars, according to Commodity.com. These numbers seemed so high that I could not imagine how would they ever be able to pay it all off. What is even crazier is the fact that countries without any national debt could be counted on fingers of one hand. Well, actually, to be exact, all countries issue debt, therefore one that is literally unindebted does not exist. Some of them however possess worthy assets for instance which outweigh their debt, resulting in a country’s net debt equalling zero.
A great example for this would be Singapore. Its gross national debt is measured to be around 110% of its GDP, or 690 million dollars. Deducting the cash, shares, debentures, and bonds that the country issues, we calculate their net debt, which is 0% to GDP ratio. Not only the country has strong industries such as banking, which bring a lot of revenue into the state budget, in addition their government follows a very clever strategy of money management. As every other country, Singapore borrows money too, albeit not to spend it, yet rather invest it into well planned infrastructural projects that are projected to be very profitable for the country once completed. They become valuable assets that keep Singapore debt-free.
Another question that arose to me was who do countries borrow money from. In their case, borrowing it from banks is, in most times, not the best idea. In general, the more money you borrow from a certain bank, the higher an interest rate of your debt, meaning that you get charged a lot more money in return than if borrowing a smaller amount. Countries, if not very small, of course usually do not borrow only a few thousand dollars, but hundreds of thousands, or millions. From this fact, we can draw a conclusion that banks are not a good option for them when looking for a lender, simply because paying off the debt would be too expensive.
A much cheaper alternative that basically all countries have practiced for years is issuing securities, which are defined as any tradeable assets, according to One Minute Economics. Governments issue many different types of securities, depending on country to country. Thus, I will only mention three well known United States’ securities: bonds, bills and notes. Although having a bit different names, their purpose is practically the same – they are all used (by governments or companies, but we will focus on governments here) to raise needed capital. Firstly, governments put them on the market, where they can be bought either by a private sector (domestic or foreign), professional investors or financial institutions, such as banks or insurance companies, according to BBC. At that point, a buyer becomes a lender, and a government becomes a borrower. Over a certain period of time – up to 1 year at a bill, from 1 to 5 years at a note and more than 5 years at a bond – a security is paid back completely. Usually, a borrower repays all the borrowed money to a lender, adding some extra money due to an interest rate. Thus, in majority of cases, lender is the one who profits from a security.
These types of securities represent an important part in every investor’s diversified portfolio and are recognised as a safe investment. In contrast to stocks for example, they are a lot less risky, firstly because a borrower is legally obligated to pay these loans back, if it has enough resources to do that, according to Investopedia. Secondly, there is an exceedingly small chance that a country will not be able to pay for what it borrowed, in other words there is a very small possibility for it to default. As a result of these securities carrying such low risk, their price and profit from return are lower as well.
Most countries however have defaulted at least once during their history, although in most cases not in the 21st century, with some exceptions, like Argentina and Venezuela. Because of so-called sovereign defaults, without worries, nobody will just suddenly “close” the country like it happens to companies when they declare bankruptcy. Moreover, no courts exist that would deal with this matter, according to Management Study Guide, and there is no international law for bankruptcy, as Robert Shapiro, formerly of the Clinton administration, explained for Npr.org. Although a country will not face any official political or legal consequences (with some exceptions, for example European Union member states have a limit of how much debt they are allowed to have), want it or not, defaults have a bad impact on a country’s economy and its reputation especially in the financial and business world. Its credit rating would drop, making a country untrustworthy to lenders who would therefore be less likely to lend capital in the future, as George McKay explained for Quora.
The country has many options on how to react to a situation like this. One possibility would be to cut spending and ramp up taxes. It may also ask another country or an organization for financial help. Another alternative would be to restructure its debts, albeit it reduces the original value of bonds, or extends the delivery date so that it gets more time to pay lenders.
Nevertheless, would not the easiest way for countries to pay off their debt be to simply print an amount of money needed? Well, Zimbabwe could tell you why this is a horrible idea. In 2007, the country printed a lot of money in hope of economic growth, which had a completely opposite consequence. Quickly after that, an era of hyperinflation began, and prices of goods and services at some point rose for more than 231 million % every month. That meant that prices were continuously doubling in less than a day, according to Janet Koech’s 2011 Annual Report on Hyperinflation in Zimbabwe. For comparison, normal and still controllable inflation rate is around 2-3% per year.
Why this happened in Zimbabwe is because the higher the money supply, the lower worth of a currency, which meant that people there needed more and more money to purchase the same good or service. Only after a few months or even less, savings of most population were gone, and barely any were still able to afford basic necessities, like food. Zimbabwean government tried to keep up with hyperinflation by printing money in higher and higher denomination, which went so far that in July 2008, they issued a $100 billion banknote. However, what citizens could buy with it is shocking – only three eggs (yes, you read that right). Therefore, it is no wonder why some protestors called themselves hungry billionaires. In 2009, a banknote with the largest denomination of currency ever in history, worth 100 trillion Zimbabwean dollars ($100,000,000,000,000), was issued. It was worth only 40 U.S. cents. Their currency became so worthless that they had to abandon it and switch to U.S. dollars and South African rand. In this way, they manage to solve the problem, but are facing another inflation this year with an inflation rate over 300%.
What also sparked my interest was how can be Japan, for example, called an “economic superpower”, if it has the most debt to GDP ratio in the world? An answer to this question is that being in debt is not always a bad thing, if managed right. Many countries, like Singapore, which I already listed in this article, use it to get enough money to invest it into valuable assets and help their economy grow. It is much faster to issue debt, receive money and invest it right away, than to first save capital for years and then invest.
Debt is often associated with problems. However, it is surprisingly not always problematic, and some countries cleverly use it to their benefit. It can in no way be solved by printing money – well, in this way, you can at least become a billionaire, though.
