Thread by @theweb3sharma

Why do governments default on debt!!

News channels won't talk about it at all

But,
It's simple to understand

Let's dive in on the secret of how governments work 👇🧵
#debt #currency #assets

A government runs ultimately on the same simple accounting rules as we all have learnt.

The two basic ingredients:

1. Revenue (money coming in)
2. Expenses (money going out)

There are two scenarios:

When revenue exceeds expenses, an individual has “savings” — a government has a “surplus.”

When expenses exceed revenue, an individual has a problem — a government has a “deficit.”

This imbalance is concerning for an individual but a government has more leeway to solve this.

Governments can simply kick the can and borrow from the future to meet the deficit.

The graph below shows how the deficit has been growing in the past few decades

The government is borrowing more debt from the future to cover the fiscal deficit

More the debt, more is the future obligation to service the debt and it keeps on growing until it spirals out of control in most cases

When a superpower borrows too much, a few things happen:

1. Their financial position worsens (they have a lot of debt)

2. People and countries begin to view them as higher risk borrowers (interest rates go up)

3. They have to spend more on interest expense (now that they have higher interest rate debt)

Now, the question is how do we get out of this?

Going back to the basic accounting measure that we discussed

The idea is to come out of the deficit by either increasing revenues or decreasing spending or both

Well there are few ways the governments can do that:

1. Spending cuts

This would mean that the budget has lesser allocation of capital to different departments and developmental activities

Subsidies are reduced and freebies taken away

This means - unhappy public and politically anyone would be dis-incentivized to do this

2. Higher taxes

Governments eventually have to tax the people to get a larger share of their revenue in the form of taxes to cover for the deficit

This is because major source of revenues for governments are through taxes

Again politically dis-incentivization to do this

However we see that this is not happening, and hence the only way left to cover the deficit is still....

You guessed it right - taking more debt

And with raising the debt ceiling, the govt has kicked down the can again

Bottom-line:

We need to understand the direct implications it might have for us:

1. Loss of purchasing power of the currency
2. Higher inflation rates

Store of Value assets like: Bitcoin and Gold
could be very attractive right now

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