Public debt and final spurt arms races

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Public debts have been discussed a lot in recent years, and public debt no doubt has a substantial influence on a nation's ability to compete in an arms race.

I think specifically of the two-year arms races which happened prior to the World Wars, not the extended ones like the Cold War, the dreadnought race or France's army efforts in the 1880's to 1900's.

There is a substantial difference between public debt and public debt, though - and I'd like to waste some lines on it.

One kind of public debt - such as in Germany - is essentially the manifested niceness of the government in its relations with the rich. The government asks the rich politely to buy bonds, instead of harshly telling them to pay high taxes or else. 

This kind of debt raises some doubts about whether the complex of motivations in the country would withstand a higher taxation, but it does not cast doubt on a country's ability to afford its public spending in the medium term, possibly even long term.

The other kind of public debt happens in countries with a trade balance deficit (goods and services). The model of a developing country explains this best. Let's assume a developing country wants to buy a dam and hydro powerplant. It may be able to build the dam on its own, but it cannot build the powerplant, so it seeks foreign credit and buys it from abroad. No amount of taxing the rich would have helped here if the country has a trade balance deficit. Taking foreign currency from the own people (typically the rich, for that's where most wealth is) would simply have meant that other imports would be curbed and to a lesser degree non-government entities and citizens would have taken the foreign credit instead.

Additionally, the debt would be in foreign currency as the foreign corporation would not accept banana republic dollars, so the central bank cannot simply inflate the debt away with the (imported) money press (which is still possible even with inflation-indexed bonds).

The difference between both kinds of public debt is huge in my opinion.

The former merely means that the government has become complacent and delayed domestic conflicts about the distribution of burdens. This kind of debt does not indicate a very much weakened ability to compete in a final spurt arms race.

Public debt coupled with trade balance deficits is different. It shows the the country is living beyond its means, apparently including the government. It would require drastic steps including conscription -possibly even of workers- to overcome this and participate in a final spurt arms race. Either way, such a country would be disadvantaged in the arms race.

Luckily, we are in an extremely imbalanced world situation with one bloc being ridiculously overpowered in terms of fiscal power that final spurt arms races are only likely in a regional context.

S O

This blog post is supposed to clarify and correct earlier ones:

2011-08 Public debt and the military

2009-07 Our fiscal policy is scary

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