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It would seem that having no debt would categorically be a good thing. I have heard Dave Ramsey say many times that:

The Forbes 400 is a list of the richest 400 people in America as rated by Forbes magazine. When surveyed, 75% of the Forbes 400 (rich people, not your broke brother-in-law with an opinion) said the best way to build wealth is to become and stay debt-free.

Now, obviously he is talking about individuals and families. It made me wonder though if it applied to countries. Are there any (theoretical or historical) negative consequences of a country being (more or less) debt free?

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Alexander Hamilton believed (and convinced George Washington) that a little national debt (not the massive amount we have now) is a good thing. By being in a little debt, the countries that we owe money to would defend us in war because they don't want to lose their investment. Also, as long as we pay back the debt, with interest, other countries are more willing to be friendly with us because we are a good economic investment. If we were to have no debt, other countries would have no vested interest in us, and we would not have the same influence we did on other countries.

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    +1 for national influence and the effect of intertwined economies discouraging wars and promoting allies. – user117 Dec 7 '12 at 2:42
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    When I owe you a dollar, it's my problem. When I owe you a million dollars, it's YOUR problem :) – user4012 Dec 7 '12 at 2:43
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    imo, this is bad reasoning and a bad excuse for getting into debt. If the country had no debt then they could afford to defend themselves in wars, or afford to lend money to other countries (if they wanted to) which the other countries would appreciate. – dbjohn Dec 12 '12 at 15:46
  • Not being in debt is not the same thing as having money. In order for the U.S. to eliminate it's deficit we'd either have to raise taxes substantially, or eliminate numerous government programs and make drastic spending cuts (including to our military budget). This would leave us less able to defend ourselves, and due to the cuts in social programs millions of people would be left destitute and would go hungry. – J. Antonio Perez Jun 23 '17 at 16:27
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    Also, countries don't really "appreciate" being lent money. I've never seen anyone thank China or Japan for lending the U.S. money. – J. Antonio Perez Jun 23 '17 at 16:33
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If we are talking about the United States and most countries that operate on a Fractional Reserve Banking system then a government unable to accumulate debt would be an economic disaster.

Much like how a bank is able to lend out far more money than it holds in assets able to carry that risk, if everybody takes a run on the bank then the illusion of all that borrowed money in the system is crashed and the economy takes a nose dive. We maintain the illusion of course because of the simple fact that borrowing money now and quickly provides for a fast efficient economy.

Governments are much the same way in that they are also borrowing from central banks by floating bonds. These bonds have an opportunity to mature so that they cannot be paid back immediately. They retain value however as long as people are willing to buy them, and they are valuable even though they may never be really paid back because the government spends a good deal of its annual budget on servicing that debt (paying interest). That interest is generally good to peg to inflation which is why they are considered safe as long as the government as considered safe and legitimate.

So in essence most money introduced the system is through debt, and while it is a house of cards, the alternative would be that government would be slow and ineffective to react, unable to handle national emergencies or wars, and would periodically run the risk of ineffective services due to an extremely volatile income (tax income goes down in a bad economy).

If instead they were to print money every time they ran short then inflation would be highly volatile as well and this would cause the economy to be highly volatile (Eg. see the 19th century US economy for an example).

For matters of national security, and a quick efficient economy the government must be able to introduce money into the system by taking on debt as it does not have a sudden effect on inflation and makes the government more functional.

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  • Basically, debt allows for investment, which leads to long term growth. – segiddins Dec 7 '12 at 3:20
  • I didn't mean that the government couldn't go in to debt, just that for the most part they properly stayed out of debt. Sorry if that was unclear. Furthermore, to correct some of the problems you mention with not being able to go into debt, couldn't a government have a "rainy day fund"? – mikeazo Dec 7 '12 at 12:10
  • oh the irony of a "rainy day fund" one day after the governor of New Jersey goes to the White House to ask for money for his particularly rainy day. – corsiKa Dec 7 '12 at 19:59
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I believe the only case in modern history of an industrialized country paying off its debt was the U.S. when Andrew Jackson was president. And one of the consequences was a depression. However depressions were regular occurrences up until post WWII so it could have been coincidence.

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    If it could have been a coincidence, it was not a consequence. Maybe better to phrase as "Afterward, there was a depression"? – gerrit Dec 13 '12 at 21:24
  • Good point on the better way to word that. There were a lot of strong arguments that eliminating the debt caused the depression. But 1 data point is not proof. – David Thielen Dec 13 '12 at 23:41
  • What happened in the 1830s had a lot of similarities to what happened in the 2000s. The Second Bank of the United States spent much of its profits supporting the political opposition to Jackson. Jackson refused to renew the Bank's charter, and shifted the federal government's banking business to state-chartered banks run by Jackson's cronies. The state-chartered banks lent out lots of money. Ordinary people borrowed money and invested in businesses and houses, and bought land from the government. The government sold enough land that it could pay off the national debt.... – Jasper Nov 29 '14 at 2:13
  • ... and many States borrowed huge amounts of money to build canals. Eventually, two things happened: 1) The federal government got scared by the loose money policies of the state-chartered banks, and decided to limit which banks it did business with. 2) Railroads made the canals obsolete (even before the states had finished building them). The banks were forced to cut back on their lending, there was a "Panic", and lots of states went bankrupt. But even during the resulting Depression, Americans kept building railroads and inventing things. – Jasper Nov 29 '14 at 2:19
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    Also, it is a stretch to call the United States of the 1830s "industrialized". – Jasper Nov 29 '14 at 2:21

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