Government Debt Theoritizing - Essay Example

? ONE SHOULD NOT BE UNDULY ALARMED BY THE SIZE OF GOVERNMENT DEBT AS IT DOES NOT NEED TO BE REPAID AND THAT THIS IS A DEBT THAT WE OWE TO OURSELVES. DISCUSS Name: Instructor: Task: Date: There is no alarm for the government’s debt size as it does not need to be repaid and that this is a debt to us Introduction Government debt refers to the aggregate value of the bonds and securities that the government has incurred in deficits. This debt is outstanding and financed through borrowing (Wells & Krugman, 2009). These finances are necessary in funding government operations and implementing monetary policies that solve the populace’s problems and cushion them against recessive economies (Pentecost, 2010). The following theories affirm that there is no alarm when government acquires debt. Attainment of key objectives in providing amenities to the citizens should be the primary concern of the government holding the people's wealth in the form of taxes, fees and fines (Burda & Wyplosz, 2005). Policy makers take account of risk factors more than the mere increase in price value of the loans before going for one. Therefore, it is imperative to say that the increase in government debt should not be a prime concern to the citizens since an amount borrowed and well spent can warrant further borrowing as the amenities set up provide an indispensable source of creating more national wealth (Gordon, 2006). As the government expands the supply of money through creating national debts, inflation is bound to occur. When the government tries to pay off this debt, the supply of money in the circulation tends to decrease causing deflation. Thus, when there is payment of any noteworthy sum of liability more than the national debt is being made at any given time; up to, ten times less, the amount is due for repayment (Gordon, 2006). This is to say if the government paid all its debt today, money supply would contract upwards by approximately ten per cent (Carlin & Soskice, 2006). This would translate into a decrease by around one third of money in circulation, and a reduction by one-third the price of the price of commodities. This adjustment period hampers the monetary trade, translating into large pay cuts and citizens not being able to afford basic amenities. This forces Companies to adjust their workforce salaries below the minimum wage rate (Wells & Krugman, 2009). It is worth denoting that a gigantic government debt should not be a bother to the citizens, as payment of this lump some debt will result to citizens bearing the complex consequences of an expensive lifestyle. It is imperative to state that a range of factors determine the coupon payment including the face value, frequency of payment and maturity of the bonds. It is vital to consider the yield on comparable investment plans in the loan repayment schedules. The government thus gets enough time to get value for the advanced loans before they are due for repayment (Pentecost, 2010). Considering the current market value of the bonds issued and debt owed, the government will pay a lower end sum amount than the amount formally lent. In case the bonds were issued to internal lenders, it significantly becomes clear that the money is ploughed back to the economy and money owed to the country’s citizens and held by the state in accomplishing fiscal objectives (Blinder and Baurnol 2010). Therefore, this implies that the size of government debt should not bother the citizens on its repayment manner as at times, the debt tends to be lower compared to the amount borrowed initially, implying that the remaining portion caters for a better and improved economy. The debt to income ratio (DTI) measures the government’s revenue that goes in settling debts (Dornbusch, Fischer & Startz, 2001). The government has a duty to cater for the welfare of its citizens and cannot collect enough revenue in taxes to cover for all the recurrent expenses, and physical developments. This necessitates for borrowing to meet the obligations and targets of the fiscal year. There is a need for escalating Gross Domestic Product (GDP) considerably in an objective to override the current interest rates. The interest rates repayments have an inverse relationship with income. When interest rate increases, the government issues more bonds, leading to a higher debt to income ratio as a way to get money for funding its activities (Carlin & Soskice, 2006). Borrowing a specified value of money for development and repaying with interest does not necessitate paying the actual amount and the written down interests (Pentecost, 2010). The Tobin’s Q theory explains the ration between market value of assets and the replacement value of the same physical asset. In macroeconomics, the theory explains the relationship between financial fairs and market forces for commodities that the government controls in a bid to increase its revenue collection. Based on this theory, the government can pay a lower end amount of finances in return to the loaned principal amount considering the current market characteristics (Dornbusch, Fischer & Startz, 2001). It is imperative to state that government borrowing is for the betterment of the citizens implying that repayment of this amount should not concern them immensely. Investor funds encourage investments through economies of scale. In addition, the high tradeoff cost does not hamper investors Public money put in this scheme provides confidence as a good proportion of secures reasonable return on investment. Debt channeled to investor funds should thus not cause alarm, as there is a safeguard in the investment. The Seignior age tries to explain how an entity can create more money from a base principal. Throughout the period of metal currency, the economic base comprised of priceless coins. The variance amid the face worth of currencies and the rate of obtaining the metallic and coining them produced a cash subsidy for the National reserves, known as seignior age (Gordon 2006). The regime is no person; there is not one person here but we the people. Simply put, government ought to be regarded as a public trust. The citizens are taxpayers and clients of the authority’s services. It trails hence that the seignior age profits proceed to the populaces as a whole and not the aforementioned. The foreign exchanges attained from the acquisition of notes describe a claim on goods and services offered. If the notes under no circumstances return, they are a seignior age gift to people of that country (Hillier 1991). Consider a case that the government exchanges gold reserves into currency at the current market value. The gold certificates are issued to the creditors as a security for their money, and the money paid is due for return in a given year, say one fiscal year (Blinder and Baurnol 2010). The government uses this money in meeting its fiscal year objectives and in the next financial year convert the currency again back into an equal market value of gold. The second yield is likely to less than the total amount of gold issued if the relative value of gold to currency has changed. On the assumption that the value of gold remains static, and the value of the currency has decreased, the government will earn an extra value of gold in its reserves for its people (Gordon 2006). Fiscal consolidation refers to a policy envisioned to reducing deficits and accumulation of liability. It helps shrink national deficits and over-accumulation of debts over the years through measures such as tax hikes (Hillier 1991). It has the long-term effects of reducing government debt and thereby increasing output, as real interest rates follow a downward trend. This policy lightens the burden of interest repayments by cutting down taxes. The government’s spending multiplier reduces largely than when the nominal interest is bound to the lower zero ends (Gordon 2006). In recent financial crisis, the model shows that political considerations playing a key role in government are spending habits (Blinder and Baurnol 2010). It is imperative to state that the size of government debt should not concern the citizens as this in return will increase the debt to income ration and by the fact that the government hold the wealth of the people in trust; more wealth is created from a principle figure surpassing the repayment amount (Barro, 2008). The inflation rate in the government's economy is a significant objective to be observed on the interest rates of its income. High inflation rates especially in the third world countries have led to high charges on imports of the nations (Dornbusch, Fischer & Startz 2001). Considerably, it has resulted to expensive living standards since the nations affected try to regulate their interest rates through subjecting its citizens to the same conditions. Banks and other corporations have hiked the charges imposed on loan to customers. These suits the challenging inflation to reduce the debt based on constant interest rates (Pentecost, 2010). Setting limits on loan prevent build-up of predispositions on the government. It is worth denoting that the amount of government debt should not alarm the citizens as this advantage reduces the associated risks of high prices in repayment of borrowed sums of money (Dornbusch, Fischer & Startz 2001). Lower advantages translate to a drop in the value of the amount needed to put the government into negative equity. There is the elimination of severe debt overhangs, and the borrower can further obtain finance from other lenders without having undue pressure for repayment implying that the size of government debt should not be a bother to the citizens. The country's credit rating further gives the country’s ability to pay for its external debts and position to be given credit with ease (Gartner, 2006). Countries with stable economies are in a position to obtain credit waivers in favor of other interest that are not monetary (Blinder & Baurnol, 2010). Conclusion It is worth concluding that it is clear that even if the government expands its debt considerably, it should not cause alarm to the citizens as this amounts do not necessarily need to be repaid in full and that the benefits derived are much more immense than the repayment of the loan itself. List of References Burda, M, & Wyplosz C 2005, Macroeconomics: A European text, 4th edition, Oxford, OUP Barro, R 2008, Macroeconomics: a modern approach, Ohio, OH, Cengage Carlin, W, & Soskice, D 2006, Macroeconomics: Imperfections, Institutions and Policies, Oxford, OUP Chamberlin, G, & Yueh, L 2006, Macroeconomics, Thompson Dornbusch, R, Fischer, S & Startz, R 2001, Macroeconomics, 8th edition, New York, NY, McGraw Hill Gartner, M 2006, Macroeconomics, 2nd edition, New York, NY, Pearson Gordon, R 2006, Macroeconomics, 10th edition, California, CA, Pearson Wells, R, & Krugman, P, 2009, Macroeconomics. New York, NY: Worth Publishers. Blinder, A, and Baumol, W 2010, Macroeconomics: Principles and Policy. New York: Cengage Learning. 2010. Print. Pentecost, E 2010, Macroeconomics: An Open Economy Approach. London: Macmillan. Hillier, B, (1991) The Macroeconomic Debate, 2nd edition, Blackwell. Read More