Looming Sovereign Debt Crisis – What’s Wrong with State-Regulated Economics

Abstract

On January 19, 2023, the United States hit its debt ceiling, leading to a debt-ceiling crisis. US sovereign debt, for decades, was considered a risk-free investment, but the 2023 US debt ceiling crisis shocked the financial world. The COVID-19 pandemic has hung a heavy burden on public finances. Quarantined economic activity heavily affected state budget revenues all over the world. Before the Covid-19 crisis, there was the 2008 financial crisis with its famous outcomes, when economic stimulus was provided including state budget programs financed by sovereign debts. It was still pandemic circumstances when on 24 February 2022, Russia invaded Ukraine in an escalation of the Russo-Ukrainian War. In less than 20 years period the world has had three global-scale crises, but the deterioration social-economic picture is far less dramatic than it will be without state interventions. Nothing is free, it is an obvious and well-known economic axiom, so if the costs of these crises are not on the surface, it means that the problem is hidden somewhere and postponed in time. In a simplified picture we see that states' actions in the field of public finance aren’t rational. When revenues are decreasing, from a household point of view it is normal to turn on some austerity mode and live with less luxury, but different approaches are taken by the states when GDP growth and tax revenues are decreasing. The bright examples of these we saw during the 2008 financial crisis and the COVID-19 crisis. From an economic point of view, loans couldn’t be a source of prosperity. Moreover, sovereign credit puts on long-run burden on the real economy. Money is considered a sign of wealth and prosperity, but actually, in the fractional reserve banking system, it is not the same. For the creation of debt money in the modern credit system, we don’t need savings, we can create it simply from “thin air”. So, an increased volume of money and debt in the economy doesn’t mean prosperity, it means more burden on future generations and the economy at all. The real economy has to pay these debts in the long run future and there it will negatively affect welfare and prosperity. More Fiat money doesn’t create prosperity, prosperity is a result of economic growth and savings. Printing money without proportional economic growth or creating debt money without adequate savings, only exacerbates allocation of resources and wealth. So, money multiplier is not about wealth creation it’s about wealth allocations. Empirical pieces of evidence from the current century showed us that, a crisis is a signal, it is a communication instrument that should be considered correctly and with some scrutiny examinations about its origins and foundations. Tactical solutions can't give strategic outcomes. When empirical evidence shows that instruments used by the state to extinguish crises create much more scaled ones, it’s time for rethinking and structural reforms.