What Happens if the Government Defaults on their Debt

It wasn’t so long ago that Australia as a nation had no debt. Now, things couldn’t be more different. We now have more than $1 Trillion of debt, made up of treasury bonds.

Those bonds were based on the cash rate when they were set.

When a government takes out their debt, it may be a 1 year bond, 2 year bond, 10 year bond, and so on. Whenever that debt needs to be rolled over, the government must acquire a new bond. Much of the government debt was written during the pandemic, when the cash rate was at 0.1%, or 10 basis points.

Since then, interest rates have risen rapidly all over the world, so bonds that would be available to governments now have much higher interest rates attached to them.

If the cash rate went from 0.1% to 1% (which is only about a third of what it has actually risen in Australia), the government is suddenly paying 10 times as much interest on that debt as it was originally.

But didn’t the government create the money?

You might wonder, who is the government in debt to? Hasn’t it created the money itself? The answer is no. It’s important to understand how money works. The government does not make the money, the central banks create the money, they print it and they buy up bonds, which is other people’s debt.

The US government has amassed $31 trillion worth of debt. Imagine with that much debt that an interest rate went from 0.5% to 4%. That’s seven times the cost to service.

Back in 2016, when Donald Trump became president, he blamed Obama for the USA’s then $20 trillion of debt and said he would eradicate it. But even though the economy was supposed to be going well, the debt has gone up by 50% since then.

It’s not just the USA. Just about every country you know is currently in massive debt. What would happen if they all defaulted on their debt? Could it happen? Maybe. Because that debt is never getting repaid. How could it?



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