sovereign debt Flashcards
what are the two wats in which govnt can finance an expenditure
finance intertemporally and intratemporally
finance intratemporally
w/in time period
finance intertemporally
over course of time
if all a govnt expendtiures are financed by way of tax income, said govnt is said to run a
balanced budget
deficit must be financed through what
issuance of new debt
surplus can be used to
pay off existing debt
two types of debt
makrtable and non-marketable
marketable debt
securities whos ownership can be trasnferred from one entity to another and are tradeable on secondary market
4 marketable debt types
bills, notes, bonds, and treasury inflation-protected securities (tips)
non makretable debt
securities whose ownserhsip cannot be trasnferred from one entity to another and thus cannot be traded on a secondary market
two non marketable debt types
saving bonds and governemnt account series
government account series
debt govnt issues bought buy govnt itself. US govnt debt is believed to be risk free
why do we distinguish between debt help by the public and intragovernmental debt
since the govnt issues debt to itself
why not just set non marketable debt to zero
because it incentivizes others to buy the bonds too
what is most US debt like
marketable
what is cost of borrowing determined by
priamry market
why does fed inflence interest rates
to influence aggregate demand
although the current debt level is quite high, is it unprecedented
it is NOT unprecedented in per GDP terms
held by public debt
all naitonal debt that US treasury owes to a person or entitiy that is not a SUS federal govnt agency
intragovernmental debt
all national debt that the US treasury owes to another arm of the US govnt
what is total public debt sum of
sum of all debt held by public and all intragovernmetal debt
japanese interest rate is
zero
why does japan borrow
not only to fund expenditures but it also borrows to invest
what does the main determinant of wherth a govnts level of debt is sustainbles lie in
differnce between the cost of said debt and the return that is being generated with it
unlike japan why do most govnts borrow
to spend, not to invest and so the main determinant is simply amount of money that is wasted on unprductive interest outlays
when interest outlays are high
a large chunk of tax income is unproductive
when interest outlays are low
most tax income can be sed productively
what is problem when countries have a lot of debt
they tend to spend a large chunk of their tax income or unproductive interest outlays which cannot be used to fund productive programs such as infrastructure
why is interest unproductive
unproductive way to spend money because you cant use it now (less IV)
is money used to pay tax income productive
it is not productive/wasted
two determinants for what you spend on interest
1)interest rate
2)loan costs
is it precendented or unporecendente that the US wastes more than 1/3 of its tax income on unproductive interest outlays
not unprecendented but this is the highest its been in a few decades
debt is projected to _________
balloon
why is debt projected to balloon
b/c deficits are projected to be high
why are deficits predicted to be high
deficits are projected to be high b/c debt is projected to balloon
what is the least realistic reason the govnts debt stabilizes b/c the US
manages to reign in its primary deficits
why is the problem with debt balloon/deficit rise
the fed i snot charged with ensuring the sustainability of the US govnt debt so there are presently no plas to significnaly lower rates
outlook of soveriegn debt
although there is no immediate cause for concern, we wonder how much longer US debt will be risk free
2012 greek default vicious cycle
following initial credit downgrades, rsing yields and bad credit ratings fed back into each other over the cours of multiple years until default was widely deemed inevtiable
2012 greek default policies
IMF and ECB
IMF
lend an artifically low rate to buy countries time
ECB
deoress private borrowing costs by purchasing bonds on open market
