When I am in debt, I freak out. Why is it NOT okay for me to be in
debt, but it's alright for the government to be in debt?
Thanks,
Yesmam

Hi! Thanks for such an interesting question!

At first glance, the question is rather perplexing because it entails
viewing the issues on different ends of the spectrum. One viewpoint is
the macro side (seeing things in a larger perspective like the
government debt) and on the other end the micro corner (attending this
time to the small scale scene of debt).

But in actuality both viewpoints have similarities and can teach us a
lesson as well.

Yes there is indeed a bad and good side to being in debt both in the
government and personal level. The main idea is that debt is not bad
as long as you have all the right reasons on why you are borrowing
money.


Let us first take a look at government debt. Government debt actually
is a very useful and powerful arsenal for any nation. At some point it
actually contributes to nation building. Here are the reasons why it
benefits a particular nation when their government borrows money.

The first reason talks about the hot issue of budget deficit but can
also be applied to situations wherein government wants to finance
particular programs like building roads or implementing something as
complex as space programs. The reason given is that government debt
can be used as a means to control inflation.

a. ?Why don't we just print all of the money we need to pay off the
debt or to pay for government services??

?It is important to keep in mind that neither money-financed nor
bond-financed deficits are appropriate for dealing with the Federal
budget deficit. The immediate effect of financing the deficit by
printing new money may be to keep interest rates lower than they
otherwise would be. As time progresses, however, the excess money
introduced into the economy leads to higher inflation and invariably
to higher interest rates.?

?FAQs: Financial Markets?
http://www.ustreas.gov/education/faq/markets/national-debt.html#q7 


Here are additional benefits to government borrowing:

b. If the government was not allowed to borrow money then it will have
to purchase bonds and stocks, investment instruments which are
relatively riskier and less liquid. Furthermore, it will compete with
the public with such investment instruments and can distort the stock
and bond markets.

c. Treasury securities play an important role as one of the most
secure investment instruments available to the public since they are
backed by the government.

d. ?They are also attractive worldwide as a highly liquid risk-free
investment.  That is key to maintaining the U.S. dollar as the world's
reserve currency, a valuable benefit in itself.? (Only an American
perspective)

?Money, Taxes, and Government Debt?
http://wfhummel.cnchost.com/moneytaxesdebt.html 


----------------------------
In the case of personal debt, there is a good side as well.

?Good debt is generally debt that can provide a long-term financial payoff.?

Examples of these are educational loans or mortgage debt.  

?Mortgage debt is another "good" debt. To begin with, few consumers
can afford to pay cash for a home. Also, a mortgage is good debt in
the sense that a home is considered an investment as most homes will
appreciate in value over time.?


The article also discusses that relatively short-term debt is bad for
you. Here is a sample of bad debt.

?This tends to be short-term debt in which the loan lasts longer than
the item you bought with the debt, and for which there is no financial
payback. Most credit card debt falls into this category.?

?Debt - The good, the bad and the downright ugly?
http://sheknows.com/about/look/1541.htm  


As always remember the old adage... that everything in excess is bad
for you. That goes with debt whether national or personal.


Search terms used:
Benefits of government borrowing
When is debt wise

I hope these links would help you in your research. Before rating this
answer, please ask for a clarification if you have a question or if
you would need further information.
                 
Thanks for visiting us.                
                 
Regards,                 
Easterangel-ga                 
Google Answers Researcher

easterangel-I recognize your thorougness, but with my former college
music major, the answer is still difficult for me to get, which means
that I should get a really simple, highschool level book on the
introduction to economics.  Thank your for all your work and I am
going to try and chip away at this slowly.

Yesmam

Ya got me. Maybe for the same reason why it's not okay for me to go
down the block and bash my disagreeable neighbor's face in, but it's
hunky-dory for the government to declare wars?

Beats me, too, yesmam. I saw "asked by yesmam-ga" and locked it (I
like your questions!) and then I read it and thought, "Huh. I don't
know, but I look forward to seeing what everyone posts on here." Good
question. I like how your mind works.

Sincerely,
Boquinha-ga

"(I like your questions!)" Thanks Boquinha-This forum acts a little
like a message board for interesting people. I really am anticipating
an answer for this because so much of the outcome of the election
seems to weigh in on this issue. Clinton cut deficits and put us in
the black. Reagan put us in the red, but to most, this was acceptable.
My shallow knowledge is that when the government has to borrow money,
the price of borrowing money goes up for us, both personally and for
the business community. Bad for the economy.

"Good question. I like how your mind works."

Likewise. As said before, this "board" acts as a good forum for we
inquisitive types.

Yesmam

The only excuse I've ever heard for governments to be in managable
(and I stress that word) debt is that is builds better foreign
relations since for some reason other countries trust you more if you
owe them money (of course one can always start a war with the biggest
creditor and take all his possesion and thus cancel the debt (see
japan and see germany in wwII) but then what do I know about the
political mind

It depends on what you are doing with the money you gain from the
debt.  For example if you are buying a house banks would lend them to
you.  Let say if you are doing something risky with it then they will
be more likely not borrowing it to you.  In a way manageable debt is
good for the economy.  Imagine you are trying to save to purchase a
house for 30 years by paying cash - it's better for everybody if you
can borrow the money and buy the house today.  Good for you,
contractors, suppliers and ofcourse the banker.

I think better question would be what the government is doing with the
debt - is it for useful things or really bad investments.

If you were able to balance your current accounts through financing
provided by the Chinese and Japanese purchase of US T bills to offset
deficit spending then you too could defficit spend.  Unfortunately ,
treasury notes backed by the full faith and credit of the average
citizen are not commonly sought after financial instruments in most
markets...

sfhaas-I don't have the economics experience to understand your
response, but thanks for trying.
Yesmam

Hi yesmam-ga and thank you for the kind words, the 5 stars and for the
tip! :)Believe me, even with my business degree, it is still really
hard to get a firm grasp of such concepts until you study it
thoroughly.

Government debt is different for a couple reasons.

For one thing, a person can find themself in a situation where they're
indebted, but cannot pay, and hence have to go into bankruptcy, which
makes getting credit in the future harder because people won't want to
lean to you.  Government, however, can't go into bankruptcy.  It can
always pay because if in the case that there was no way to pay the
debt with money on hand, it can basically print more, and use that to
pay the debt.

Of course, the government has other avenues of appeal before resorting
to running the printing presses.  It can raise taxes to get more
money.  It can issue more debt.  I'm sure that there are other
resorts.

Moreover, debt can be a useful tool for regulating how much money
there is in the economy.  If the government wants to put more money
into the economy, it buys back bonds (or, the Federal Reserve buys
them).  That money comes from no place, really (that's how money is
"printed").  If it wants to take money out of the economy (to combat
inflation, for instance), it can sell bonds.

Government debt is also a safe investment, because the government can
never fail to pay (the whole idea that it can print more money to make
up for a shortfall in the extreme, last resort case accounts for
that).  That means it's a very safe investment.  The government might
want to issue debt to provide a safe investment.

Also, going into debt to make investments is something that both
government and an ordinary person can do.  The government can take on
debt to build a highway that will end up increasing tax revenues a few
years down the road (no pun intended).

US Government debt also tends to be a way for the international
economic community to manage things like the relative value of
currencies and such.  This is especially true of the East Asian
economies.

I'm sure there's lots of other things the government debt can be used
for.  There are the downsides.  If the government takes on too much
debt, and the interest payments grow faster than the economy does,
then the government is spending more real money on the debt, which
could have been spent on something else.  If the economy grows at
least as fast as the interest payments do, then this isn't a problem.

I hope this provides a clearer explanation of the government debt.