Macro Economics, wish to discuss one interesting thing today. Yes! Government can never be bankrupt! Probably many of us did not know this, doesn’t matter! This is something related to Macro Economics. But no need to think that it is something beyond the understanding of the common man. Let me discuss this in detail.
You must have heard that the the most secured investment available is always in Government Securities. Yes, The investment in Government Bonds and Securities always carry comparative lesser interest rate. Reason is very simple. People tend to invest in Government Securities even at low interest rate because that investment is the safest. Of course investment in the securities and bonds of even good companies and institutions is also good, because of their reputation. But still the investments in bonds and securities of these companies and institutions are not as secured as Government Securities. Because even these companies and institutions may also get into the situation of financial losses and cash crunch and thereby, the investment in these securities may be lost. But the investment in securities are the safest because they can never be lost!
Now you must be wondering, why am I talking about investment in the securities and bonds, and how is it related to the bankruptcy of Government. Yes valid question. Let me explain. The investments in Government Securities can never be lost because of credit risk. Because The Government has always the strength to repay every loan, security and bond. But how. Because the Government has the most important Trump Card! Yes. here comes into picture Macro Economics.
You must have heard about ‘Deficit Financing’. Don’t worry, I don’t want to explain with difficult economics concepts and jargons. To put in very simple words. The Government has Incomes and Expenditures. And frequently there is the situation when there is excess of expenditure over income. Did you know how the Government or State handles this situation. Yes this situation is handled with deficit financing. Deficit financing is simply printing of the currency notes to fill the shortfall of income over expenditure. Yes now you got it! Technically The Government can print the currency notes without any limit. That is the reason The State or The Government can never be the bankrupt. Of course, printing of more currency in this way creates the inflation, because in that case more money chases few goods, so government has to do that very carefully.
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