Attention deficit

With some big elections coming up there’s a lot of chatter about unsustainable government deficits. I agree they’re unsustainable, but not for the reason many people cite – that debt levels and interest costs will become unaffordable, leading to default and ruin.

Remember, as long as countries borrow in their own currency, they can just print more money to pay for the existing debt. Even when bond markets become unruly like they did in the early stages of COVID-19 or in the UK in late 2022, central banks can step in and throw money at the problem.

Intangible matters

So why do I still think deficits are unsustainable? Forget about the concept of money for a minute – that’s just something countries create and force people to use in transactions. What’s really going on is that governments are increasingly choosing how the country’s economic capacity (think human activity, machines, energy etc.) is to be deployed. They decide how big the health sector is, the reward for jobs, who can receive handouts, how many people need to be in the army etc.

I’m not saying this is a good or bad thing in general. But economic capacity needs to be allocated in a productive way, encouraging people to work as hard as possible and create efficient machines, boosting things we want like life expectancy, happiness and energy sustainability.

Currency crises?

Returning now to finance, one way to think about this is how fast the economy grows (GDP) versus the stock of liabilities helping to finance that expansion (debt). And if you look at public sector debt as a percentage of GDP, the picture doesn’t look pretty. For every dollar of additional output, the government has needed to borrow heavily. You can get away with this for a while, but eventually more efficient countries and systems should win out.

When financed by borrowing from overseas, governments are giving others a claim on their country's future production. That undermines your ability to buy as many foreign goods in the future (similar to currency depreciation), and reduces net worth (similar to inflation eroding savings).

This isn’t the same thing as default and ruin, but I still think it will prove unsustainable. Note that I am talking about economic factors here, but I also referred to other measures such as life expectancy, happiness and energy sustainability.

Maybe incorporating these things into GDP would suggest a better trajectory in the chart?