As the news talks about enforcing mandatory lockdowns, and handing out money to citizens… There has been a problem that has been rapidly expanding in the background of all of this news. …
And It is a problem that the world has never really seen before. In fact… it might create a crisis that won’t just be felt in the next week, the next month, or even the next year... but it might be felt for several decades to come…
During World War 2, Britain was in the thick of war against the axis powers. However, Britain ran into a roadblock…they were quickly running out of money. So, they began looking to borrow money from both their own future taxpayers, as well as the United States & Canada. In 1941 Britain began accepting loans and taking on debt to fund the war… and by 1945 Britain had taken on nearly $10 Billion dollars worth of debt from its creditors. At this point in time, Britains debt to GDP ratio was a whopping 200% meaning that the country had twice as much debt, as its entire market value of all its goods and services it produces over an entire year. And just some perspective for you, is that the World Bank states that once a country reaches above 77% debt to GDP ratio, its economy will begin to slow down from such a large portion of its revenue going towards paying down its debt. Anyways, after the war ended, Britain had amassed a debt that was so large, that they couldn’t pay it back in 1 year, 5 years, 10 years, or even 20 years.
On December 29, 2006, Britain made its last repayment on its World War 2 debt to The United States and Canada. This means that British taxpayers from 1945, up until 2006 had a small portion of their tax bill every year, go towards the Debt that the country accumulated in the 1940’s. And for about a decade after the war, Britains economy was drastically hindered, in part due to their outstanding debt that they incurred. However, their economy eventually recovered thanks to an influx of taxpayers, called the baby boomers, as well as some economic reforms and infrastructure investments. But a lot of the times when a country accrues as much debt as britain did, they are not so lucky.
In 2001 Argentina’s debt to GDP ratio reached a high of 166%, which caused the country to default on over $100 Billion dollars worth of debt. This default made capital move out of the country, and soon the nation saw millions of people enter poverty while unemployment reached a high of 19%. And to this day, Argentina hasn’t fully recovered from its debt crisis that it went through nearly 20 years ago. And similar stories can be said for Greece in 2012, Zimbabwe in 2006, Venezuala in 2017, and Russia in 1998. The point I am trying to make here is that even though debt can be a good thing to take on… in order to solve today’s serious problems…it will almost always have serious long-term consequences that could last for years or even decades.
So now, lets bring this back to the United States. So whether you know it or not, America essentially runs on debt. Historically, America’s economy has been so big, and has grown so fast, that taking out tens of billions of debt here or there hasn’t really been much of a big deal because it was such a small percentage of the countries overall Economy. For example In 2006, The United States had a relatively healthy Debt to GDP ratio of about 60%. But then…the financial crisis hit. During the financial crisis, the United states began scrambling for ways to pump money back into the economy… so it began taking out hundreds of billions of dollars worth of debt. And some people might think that The United States, along with every other country that took out debt to get through the financial crisis, has paid off some of their debt since 2008. But actually, the opposite of that is true.
You see, since the financial crisis, many developed countries throughout the world have been accruing more and more debt every year, while economic growth has slowed. This means that many countries may actually find it more difficult to pay off their debt now, than they did during the financial crisis.
By Guest Indiana
A high credit score is NOT an indicator of financial success... unless you think success means paying lots of interest and payments to the bank.
This is my favourite one.
I borrow money from you to spend on whatever I like. When the time comes to repay my debt, I borrow more money. From you. To repay my earlier debt to you. And you accept it, because you know I will definitely repay my debt to you. I have your full trust that I always keep my promise.
My debt to you keeps growing bigger and bigger as the years pass, but you still keep lending me money to spend however I like, because you know I always repay my debts. I always have.
Now replace ‘I’ with the U.S. central bank, and ‘you’ with all the countries in the world.
Looking for a good explanation to share.