In today’s economy when China is the major supplier to most of the western world, number of governments is struggling to keep their foreign accounts deficit at bay. To that very often comes some additional spending on expensive domestic social programmes or military engagements and an ongoing financial deficit is born.

For example as of November 2006 the US Government debt levels according to MSNBC were at US$8.55 trillion with maximum allowed debt ceiling fixed at $8.97 trillion.

Interesting thing is that in the US (and perhaps most of the other western countries) the government seems to handle its credits the way which would be disastrous to any other individual. Once its finance deficit reaches the allowed credit limit (in US set by the Congress) the government simply initiates a vote and gets its credit limit increased. Again, in the US the credit limits are set by Congress i.e. the same folks who get to spend the money too. Imagine that every credit card holder would be allowed to do the same and increase his/her credit card limit every time the need arises. Indeed a recepy for disaster.

Once the credit limit is approved by the governing body the money is raised by issuing some kind of government bonds (e.g. Treasury securities in the US). The investors who deem the government credible will purchase the bonds and provide the country with needed cash to run its economical affairs. As long as the investors are interested in the government’s newly issued bonds, this process can go on for a long time without much immediate disruptions to the economy.

On the end however every debt needs to be repaid somehow. At normal circumstances, the governments will use their budget surpluses of the prosperous ways to repay its borrowings from the dismal years of the past. Not unlike many credit card holders who choose to use unplanned financial windfalls in the form of tax refunds, pay rises etc. to reduce his/her own debt.

If you want to know more about the dangers of running a country at deficit read the Warren Buffett article “Selling the Nation” written for Fortune magazine in November 2003. The ideas apply to everyone and are valid as much today as they were in 2003.

This entry was posted on Saturday, January 6th, 2007 at 11:16 am and is filed under Miscalleanous, My View. You can follow any responses to this entry through the RSS feed. You can leave a response, or trackback from your own site.