The Economics and Ethics of Government Default, Part II

by Kristoffer Mousten Hansen

The Nature of Government Debt

People holding public debt will list such debt among their assets, alongside other financial assets. The public debt, thus, at first glance looks like it is part of people’s capital invested in productive endeavors, and from the point of view of the individual investor, this is indeed the case. Investors do not necessarily look at what their funds are used for when making an investment. They are focused on the security of their principal and the expected return. However, the economist takes a different view of credit and can distinguish two general kinds of investment: consumer credit and producer credit.

Consumer credit is loans made for purposes of present consumption. Investors transfer saved funds to people who spend them on present consumption. The saved-up capital is thus destroyed or transformed into durable consumer goods such as houses and cars. Producer credit, on the other hand, is lent to entrepreneurs who wish to expand their production.

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