Is excessive government debt a trigger for financial crises?

Hey, we can talk about this issue.

To understand the relationship between government debt and financial crises, let's use a simple analogy:

Imagine a family (representing a country) with a stable income, but they spend a bit lavishly, continuously relying on credit cards and loans (issuing government bonds).

Initially, as long as their credit is good, they can always borrow new money to pay off old debts, and life seems quite comfortable. But if their debt grows larger and larger, far exceeding their income, then trouble arises.

Excessive government debt may not directly trigger a financial crisis, but it is absolutely a top-tier "powder keg." It makes the entire national economy extremely fragile, and once it encounters a spark (such as a global economic recession, a sudden war, or problems with domestic banks), it can lead to a violent explosion.

Specifically, high government debt primarily increases the risk of financial crises through the following channels:

1. Credit Collapse Risk

When debt reaches a certain level, domestic and international investors will start to doubt: "Can this guy really pay back the money in the future?" Once this doubt spreads, no one will be willing to buy its government bonds anymore, or they will demand extremely high interest rates.

• Consequences: The government cannot borrow new money to pay off old debts, which may lead to sovereign debt default. This is like a personal credit card maxing out; the nation's credit is bankrupt. This will directly trigger a financial tsunami, because many domestic and foreign banks and funds hold this country's bonds. If the government defaults, these financial institutions will instantly suffer huge losses, or even collapse. The European debt crisis around 2010, with Greece as a typical example, illustrates this.

2. Soaring Interest Rate Risk

To attract people to buy its bonds, the government can only continuously raise interest rates. Government bond rates are usually considered "risk-free rates" and form the "foundation" of the entire society's financing costs.

• Consequences: When the government's borrowing costs increase, banks' lending rates to businesses and individuals must also rise accordingly. If it's harder and more expensive for businesses to get loans, they will be less willing to invest and expand production; if personal mortgage and car loan interest rates are high, people will be less willing to consume. The vitality of the entire economy is suppressed, easily leading to a recession.

3. The Temptation to "Print Money"

If the government truly cannot borrow money in the market, but needs funds to pay salaries, undertake construction projects, and pay interest, it might resort to the last option: letting the central bank directly "print money" for the government to spend.

• Consequences: This is equivalent to injecting a large amount of money into the market out of thin air, but the quantity of goods and services does not increase. The result is hyperinflation. The money in your hand will rapidly become worthless, prices will skyrocket, and society will fall into chaos. This in itself is a severe economic crisis.

4. Compressed Fiscal Space

A large portion of the government's annual fiscal revenue goes towards paying interest on national debt. As the debt snowball grows larger and larger, interest payments also become a huge burden.

• Consequences: This means that the money the government spends on important areas such as education, healthcare, scientific research, and infrastructure construction decreases. More critically, when a real crisis (like the 2008 financial tsunami or the COVID-19 pandemic) strikes, the government, burdened by heavy debt, finds it difficult to allocate large-scale funds to stimulate the economy, rescue businesses, and assist the public. Its ability to respond to crises is greatly diminished.

To summarize

So, you can understand it this way:

High government debt is like a person's underlying health condition. Having an underlying condition doesn't mean you'll immediately collapse, but your body is definitely more fragile than a healthy person's. Normally, you might just feel a bit weak, but once a flu virus (external shock) comes along, others might just sneeze, while you might end up directly in the ICU.

Therefore, stating that "excessive government debt is a trigger for financial crises" is entirely valid. It creates perfect conditions for the outbreak of a financial crisis by shaking national credit, pushing up social costs, triggering inflationary expectations, and weakening the government's response capabilities.