Saturday, December 3, 2011

Where does government debt come from?

Government debt arises as a result of the issue of government bonds.
Government bonds are issued by a country in order to finance investments without raising taxes. In principle, that's a smart idea, if you think about it.

That's how it works (simple case): Government issues bonds at 95$ today promising it will buy them back the following year at 100$. The difference between the two numbers (100-95=5$) is the interest, which, if divided by the issue price, reveals the interest rate (5/95=5,26%).

Everyone can buy government bonds: banks, companies, but also ordinary people like you and I.
Bond subscribers therefore lend money to the state and become creditors. Government, on the opposite, contracts a debt that must be paid for in due time.

Friday, November 25, 2011

Why this economic crisis then?

The reason behind the crisis we are all enduring today is essentially one: debt. In particular, government debt.

In the past, economists like John M. Keynes promoted the idea that governments should encourage private investments during economic slumps in order to avoid recessions.
By giving companies generous loans at cheap interest, that is, cheap price, which can be paid back once the economic slump is over.

At a first glance, there seems to be no danger at all in this procedure. History, however, has proved the opposite.

Thursday, November 24, 2011

Why this economic crisis by the way?

This blog, like most others, has been created to satisfy a personal need. The need to inform people about complicated matters by using straightforward concepts.
It is important, especially in difficult times, that things are understood as they are, plain and clear. Regrettably enough, what many people fail to conceive is that, sometimes, the explanation of a very complicated question is indeed very simple.

I have the presumption to say that this is the case of the financial crisis that is currently spreading throughout the world.

On one hand, it would be too naive to pretend that a simple explanation will also be exhaustive; on the other, someone more knowledgeable than me noticed that, most of the times, roughly 80% of the effects come from 20% of the causes.
This is the line I want to follow. This is the line I want you to discover. Because Economics is not just for economists: Economics is for everyone.