Crises are not caused by excessive risk in high-risk assets. Instead, they arise when investors, government bodies, and households accumulate risk in assets deemed low-risk. The 2008 financial crisis, for example, was not solely due to subprime mortgages; rather, it was a more complex issue with state-owned entities backing these mortgages, leading investors to believe they were safe.
The real danger lies in government bonds, which are often considered "no risk" and do not require capital to support. When the value of these bonds drops, banks' balance sheets are negatively impacted, causing issues even if central banks intervene. If investors are forced to sell bonds and do not buy new ones, this can lead to solvency issues.
A financial crisis often highlights the government's insolvency. If the safest asset loses value, banks will struggle to manage their asset base, leading to a financial crisis. Regulations that label government debt as "no risk" contribute to this problem, allowing banks to leverage heavily against government bonds. When a currency loses value, it hurts purchasing power and can lead to inflation and issues in sovereign bonds.
Government debt has soared due to policies like Keynesianism and Modern Monetary Theory (MMT). This debt is compounded by unfunded liabilities that far exceed the official debt numbers, with the U. S. unfunded liabilities reportedly over 600% of its GDP. Nations like France and Germany also see significant unfunded liabilities.
According to experts, excessive government debt can lead to corrections in bond markets that affect other assets. Predictions suggest that sovereign debt could approach $130 trillion by 2028, primarily due to large deficits. Yet, many believe that public debt is not a concern because governments can continuously issue more debt, which is incorrect.
Governments face three limits on their ability to borrow: economic, fiscal, and inflationary. Rising debt and deficits hinder economic growth and can lead to lower-than-expected tax revenues. Economies may stagnate or even decline when debt becomes excessive. Increased money printing can also lead to inflation, further harming the economy.
In many developed nations, these limits have been exceeded, but governments continue to spend without cuts, leading to unsustainable debt levels. Countries like Brazil and India are experiencing currency declines due to public finance concerns. The euro has struggled due to fiscal problems in France and the pressure on Germany to increase spending.
When a debt crisis occurs, it will usually be blamed on a final trigger, but it will have been caused by the government's excessive borrowing. Taxpayers and businesses will be the ones to pay the price, and politicians may push for even more spending as a solution to the crisis.
https://mises.org/mises-wire/government-spending-will-cause-next-financial-crisis
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