What so bad about budget deficits?

Examples?

Update:

Actual Reality your analogy is abit too simple. I want the repurcussions. Do they really matter as much? Look at the ameican behaviour now. They have trillions in debts but the great economists at the Fed are hardly treating it as a major problem. Are the effects of a budget deficit overhyped?

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  • 1 decade ago
    Best Answer

    Budget deficits are not always bad. They must be funded though by either borrowing or selling assets. Again this is not always bad however funding a deficit through selling assets cannot continue forever.

    Funding a deficit through borrowing can be continued indefinitely provided that you are using the money in a way that increases your ability to pay back that debt.

    eg, Nation A may borrow money at 7% from Nation B. This money may be used to build a factory that generates a 10% return on investment. Nation A earns a 7% return, Nation B earns a 3% return (10% - 7%).

    Nations may continue this borrowing pattern for many decades, getting further and further into debt, yet increasing their ability to pay back at an even faster rate. Provided the investments are wise (not for example a Presidential palace or pointless monument), the debt should never become an issue, and indeed will help the nation grow economically.

  • 1 decade ago

    I suppose budget deficits are not inherently bad. Running a deficit to finance feasible economic projects is probably good economic policy. We all dissave at some point in our lives to finance personal projects.

    Much of the negative vibe associated with budget deficits stem from the fact that they accumulate to form debt. For a country like the US, this might not be seen as a problem at all. My basis for saying this is that the US doesn't have much of a problem of financing its debt. Developing countries, however, are adversely affected by debt accumulation. Enlisting aid from international organizations like the IMF becomes increasingly difficult the greater the debt held by such a country. Given the current economic state of the US, failing an entire crash of the economic and political system, it is highly unlikely that the US's creditwothiness will be reduced to that of a developing country's, even if it has a substantial amount of debt.

    The overhyping that you talk about might apply for budget deficits in first world countries, but loses all validity when applied to the economies of developing countries.

  • 1 decade ago

    There is nothing wrong with them as long as the money is spent on the right things. The government is not a household. Most people think that debt at home is bad so it must be bad for the government too. If the government is investing in things that will pay off in the future like education, infrastructure, or R&D then deficits create leverage for these investments. That is a good thing most of the time.

  • WikiJo
    Lv 6
    1 decade ago

    The deficit is the amount the debt increased that year.

    The debt & its interest already exist.

    How much more debt will there be this year from last year ?

    How much deeper a hole has the government dug for the country?

    Every dollar of the debt has interest paid on it until it is paid back.

    Spending one dollar today with compound interest could be like spending 3 , 5 or some other higher number in total.

    Argentina. Hungary. Many countries in Africa.

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  • 1 decade ago

    Budget deficits happens when the government spend more money than it's collecting through taxes... Thus it leads to a lot of debt, debt and debt issues...

  • 1 decade ago

    Well a simple example: Let's say you have a lemonade stand, and your friend has a cookie stand.

    You buy 10 cookies from your friend at 1 dollar a piece. So you spend 10 dollars. But your friend only buys 5 glasses of lemonade from you, at 1 dollar a piece. So you are trading more money to him than he is to you...eventually, you would run out of money and need a loan - loans have interest rates attached to them. Simple example, but that is what is happening.

  • 1 decade ago

    Budget deficits undermine the value of our currency. What the economists call 'inflation", is really a devalued Dollar.

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