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Recently I was reading an article on ft.com, and I came across this quote:

They [yield on gilts and bonds] are particularly striking in the cases of the US and UK,which unlike Germany, run very large fiscal deficits and are experiencing very rapid increases in public sector indebtedness.

What does the author mean in this context?

Thanks!

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Running a fiscal deficit means a government is spending more money than it is taking in as taxes, fees, penalties, fines, etc, with the extra money that is being spent being borrowed by selling bonds to willing buyers. Interest paid to said buyers is another government expense in future years, and of course, the bonds must ultimately be redeemed and the buyers paid off. The buyers of the bonds must have some confidence that they will get the interest they have been promised as well as be paid off ultimately. As the government's indebtedness increases, buyers are likely to demand higher interest rates as inducements to buy the bonds. And so it goes...

  • Note that under some circumstances fiscal deficits, even in the long term, aren't intrinsically a bad idea: if government revenue will be higher in the future, especially due to economic growth, their ability to repay these debts in the future will remain intact. Then it might make more sense to spend that money now. The author's concern is largely a matter of scale: "very large" fiscal deficits, like what happens after you raise federal spending 50%, permanently, while revenues are flat. – user296 May 15 '12 at 16:59
  • I very carefully avoided discussing whether fiscal deficits are good or bad. Let's keep it that way because this question is close to being off-topic for money.SE – Dilip Sarwate May 15 '12 at 17:04
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The author notes how high the current US Debt is, about $15.7 trillion dollars. (That's 15,700,000,000,000). In 2011, the entire US GDP was just over $15T.

You can research and find that many feel this ratio i.e. debt to GDP is a significant factor in a country's ability to pay its debt. We are still running a deficit this year, and the author points out that given these factors, he'd expect investors in US bonds to demand a higher return for their risk.

On a lighter note, we've been watching our debt for decades. I am near 50, and remember seeing the debt clock when I was a teen. It's on a building in Manhattan on 44th street just west of 6th avenue. It's wasn't until the early 80's that our debt went over $1Trillion for the first time, and the clock itself needed to have more digits added to its structure. $999 billion was its limit.

US Debt Clock

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