The Debt

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Here's how it works. The federal government pays for things like defense equipment, health care, and construction. It contracts with private firms who then hire new employees. They spend their government-subsidized wages on gasoline, groceries, and new clothes.

The same effect occurs with the employees the federal government hires directly. The only way to reduce the debt is to either raise taxes or cut spending. Either of those can slow economic growth. Cutting spending has pitfalls. Government spending is a component of GDP. If the government cuts spending too much, economic growth will slow. That leads to lower revenues and a larger deficit.

The best solution is to cut spending on areas that do not create many jobs. Tax increases beyond the 50 percent bracket can slow growth. The industries or groups that pay higher taxes will get angry. Politically, they often end a politician's career. That's why the U.

The Debt Series

Most governments can safely finance their deficits instead of balancing the budget. Government bonds finance the deficit. As long as the debt is below the tipping point, creditors believe the government will repay them. Government bonds remain attractive than riskier corporate bonds.

When debt is moderate, government interest rates can remain low. That allows governments to keep running deficits for years.

Moderate increases in the debt will boost economic growth. But too much debt increases growth too fast. If growth is faster than the ideal range of percent, it will create a boom, which leads to a bust. An ever-increasing national debt slowly dampens growth over the long term.

The Debt Snowball: How and Why this Method Works

Debt holders know in the back of their minds that it must be repaid one day. They demand larger interest payments. They want compensation for an increasing risk that they won't be repaid. They don't have the funds to expand and hire new workers.

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As people shop less, firms slash prices. As they make less money, they lay off workers. If interest rates continue to rise, it can cause a recession. The first sign is when the country finds it can no longer get a low-interest rate from lenders. Banks worry that the country cannot afford to pay the bonds. That costs the country more to refinance its debt. Investors compare the debt to the nation's ability to pay it off.

It divides the debt by the nation's gross domestic product. That's everything the country produces in a year.

Ordering an extract from the debt collection register -

Investors worry about default when the debt-to-GDP ratio is greater than 77 percent. That's the tipping point , according to a study by the World Bank. Every percentage point of debt above this level costs the country 1. If the debt-to-GDP ratio is higher, it will slow growth by 2 percent each year. When it threatens to default, it creates a crisis.

More Details

Iceland defaulted when it bailed out its banks. In the United States, an example is with some municipal bonds.

I can't pay my debts

In the second, debt results from a security bond issued by the Federal Government through public offer auctions, book building or syndicated operations or direct issuances to specific holders. The contractual debt is usually made with multilateral organizations, such as World Bank and Interamerican Development Bank, with government agencies e.

Nowadays, the total amount of the Federal Public Debt in the national market is paid in BRL and captured by the public bonds issuance. Contractual debt under the National Treasury refers exclusively to external debt, since the domestic contractual debt has been securitized over the years and is therefore classified as part of the domestic debt.

For more information about the concepts and ways to classify the Federal Public Debt, consult the book Public Debt: The Brazilian Experience , part 1, chapter 4. Tesouro Nacional. Aumentar fonte:.