A Few Words about Government Bonds#
This article discusses the historical background and role of government bonds, as well as their impact on national development. From the government bond events during the Qing Dynasty to the modern borrowing and lending models of nations, the author uses historical cases and comparative analysis to explain the importance of government bonds in resource allocation and development.
• Government bonds are an important tool for national resource allocation, helping the country raise funds for development and emergencies.
• The efficiency of the government bond system depends on economic growth and debt management, with key importance placed on borrowing to repay existing debts.
• Issuing government bonds requires caution, as excessive borrowing can lead to inflation and economic collapse, with economic development being the key.
One
In 1875, a major discussion broke out among the high-ranking officials of the Qing Dynasty about whether the country should protect Xinjiang.
In the eyes of many people today, is this even a question? Sovereign territory should not be compromised, and Xinjiang is such a large piece of land. Why is there a debate about whether to protect it?
However, young people who have not experienced the hardships of life do not have a deep understanding of the question of "where does the money come from." It is only when they have many things they want to do but cannot due to lack of money, and ultimately fail to achieve them, that they gradually understand. The country is the same way, often losing large areas of territory when it is in a difficult situation.
At that time, the eastern coastal areas of China were under threat from Japan, and the northwest was being infiltrated by Russia. In theory, both areas needed to be managed, but the Qing Dynasty had just finished fighting the Taiping Rebellion, and the prosperous Jiangnan region had been reduced to ruins. The Qing Dynasty's problem was not which side to protect, but rather where to find money.
In the end, Zuo Zongtang proposed borrowing money from Western banks and using that money to purchase weapons from the United States. At that time, the United States had just finished the Civil War, and a large number of weapons were waiting to be sold at discounted prices.
The subsequent events are well-known. The Qing Dynasty eventually approved this plan, and Zuo Zongtang carried the coffin through the Yumen Pass, using the borrowed money to contain Russia's expansion in Xinjiang.
Zuo Zongtang's troops were the first batch of "American-style" troops in China, and the American-style rifles and German Krupp cannons overwhelmed the Russian-equipped forces in Xinjiang, which were essentially a generation behind. Zuo Zongtang pacified Xinjiang in less than a year.
This may be the most influential "government bond event" in modern Chinese history.
However, there is another result of this event that is rarely mentioned. At that time, the British banks agreed to lend money to the Qing Dynasty, but they required collateral, just like when you apply for a mortgage now, you need to provide bank statements. What was Zuo Zongtang's collateral?
Yes, it was the Qing Dynasty's customs revenue. After Zuo Zongtang borrowed the money, the Qing Dynasty's customs revenue went directly into the hands of the British, just like our monthly mortgage payments now.
This made Li Hongzhang suffer. He could no longer borrow money to expand the navy, similar to how if you have a monthly income of 10,000, you can only afford a loan of around 900,000. The bank will not lend you more. The Qing Dynasty's customs revenue could only support Zuo Zongtang's loan and could no longer provide loans to Li Hongzhang. After the Beiyang Fleet was completed, it did not add any more warships for 8 years, and the main warships were not repaired for 7 years because the maintenance costs were also very high. Later, in the Battle of Yalu River, they were defeated by the Japanese, who had equipped themselves with new warships, and the Northeast was almost divided by Japan and Russia.
After mediation by the great powers, Shenyang was preserved, but a large portion of the territory was indeed occupied by Russia, and later, even more was gradually eroded.
I know many people want to mention the incident of "Empress Dowager Cixi misusing naval funds to build gardens." This is a more complicated issue, and if people are interested, I can talk about it later. But here's a brief mention: the spending on the modern navy has always been exorbitant, and the money for Empress Dowager Cixi's garden had little impact.
Furthermore, defense is a supporting construction. The Qing Dynasty's defeat in the Battle of Yalu River was actually due to the land battle. The modern Japanese army completely overwhelmed the Qing army, captured the land-based fortresses, and used the Qing Dynasty's coastal artillery against its own navy. Then the army threatened Beijing, forcing the Qing Dynasty to sign a treaty.
Looking back now, if it weren't for that government bond, Xinjiang might not exist today. Of course, the strength of Agubai in Xinjiang was far from being compared to Japan, and even if those loans were given to Li Hongzhang, the outcome of the Battle of Yalu River would have been similar.
Later, the Beiyang government borrowed again, and it was this loan that provided funding for the recovery of Outer Mongolia by Xu Shuzheng. However, even after the recovery, it could not be held because by then, Russia had disappeared and was replaced by the Soviet Union. In order to ensure the Far Eastern artery, the Trans-Siberian Railway, the Soviet Union had to cut off Outer Mongolia, and China at that time did not have the strength to hold onto Outer Mongolia.
Two
China did not start engaging in advanced financial operations like "government bonds" until the late 19th century, while Europe had been doing it on a large scale since the 16th century.
When the Bank of England was established in 1694, the operation of the government borrowing money from individuals was institutionalized. In other words, the world's first central bank, the Bank of England, was established for the purpose of lending government bonds to the country.
When the country needed to wage war or provide disaster relief, but all the taxes had already been allocated and there was no surplus money, what could be done?
They would give the Bank of England a promissory note, promising to repay the principal and interest with taxes in five years. The bank would give the money to the government, and the government didn't need to worry about how the bank obtained the money.
The bank would split the promissory note given to it by the government into countless pieces and sell them to people who wanted to invest and make money. Wealthy individuals, businessmen, and even criminal organizations from all over the world could go to the Bank of England to buy this "financial product."
At first, people were a bit worried, fearing that the British government would not repay the money. So, when the British wanted to borrow money, the interest rate was very high, similar to certain "high-yield" financial products in recent years. Later, people discovered that the government never defaulted and always repaid the money on time, so everyone became reassured, and the British could borrow money at very low interest rates.
And these bonds were like printed banknotes, they all looked the same, and no matter who held them, they could go to the bank in five years and receive the principal and interest. You could also sell these bonds at a discount to others, and government bonds had a secondary market. They were highly liquid, and people were more willing to buy them, which elevated the financing capacity of the British to a new level.
It was precisely by using this advanced resource allocation system that was ahead of other countries that the British won the War of the Grand Alliance, the Seven Years' War, the Napoleonic Wars, and the Crimean War.
The United States later adopted this system and used it to rise against the odds.
Just a hundred years before the "debate over coastal defense and border defense" in the Qing Dynasty, in the fifty-second year of the Qianlong Emperor's reign, something happened on the other side of the ocean.
The American states that had driven out the British found that they couldn't get by on their own. After fighting for eight years, they were in debt and when it was time to repay the debt, they found it too painful and couldn't continue. Representatives from all the states gathered in Philadelphia for the First Continental Congress to discuss a solution to this problem.
At that time, the gentlemen were mentally prepared to default on their debts as soon as the country was established.
Later, under the promotion of Alexander Hamilton, the U.S. government decided to insist on repaying the debt. During the meeting, they also discussed several historical issues, which were later considered a united and victorious congress. Many years later, it became a key topic for elementary school students in the United States, known as the Constitutional Convention.
In fact, Hamilton had a deeper plan. If they defaulted on their debts as soon as the country was established, they would never be able to borrow money again.
If they didn't default, they could not only borrow to repay existing debts but also borrow money for development and slowly repay the debt later, just like the Dutch with their perpetual bonds, only repaying the interest.
This national strategy had a tremendous impact on the United States in the following three battles for national destiny.
The first battle was the Civil War.
The Civil War in the United States was roughly synchronized with the Taiping Rebellion in China. Both wars lacked strategic planning and were simply a matter of sacrificing lives on both sides. The Xiang Army played the "python encircling the city" strategy, and due to insufficient military pay, they would often massacre cities after capturing them. The Civil War in the United States was a battle of attrition between the North and the South, with the North using brutal casualties to wear down the South. After capturing a southern city, they would burn it to the ground, completely cutting off the South's war potential.
The South did not have a financial market or a government bond system, so they resorted to excessive issuance of paper money. Later, the inflation rate reached 1800%, and they finally couldn't hold on and collapsed.
The Northern Federal government issued government bonds through Wall Street, allowing ordinary people and the wealthy to contribute money to the war effort. It also attracted overseas investors to purchase government bonds. In the end, the North exhausted the South. If it weren't for Hamilton's decision at the beginning, the United States might have been completely finished after the Civil War and returned to being a small agrarian society in the South.
The second battle was World War II. In fact, the movie "Flags of Our Fathers" is about this. At that time, war heroes were touring like actors, calling on everyone to buy government bonds, otherwise the government would not have the money to build warships.
The third battle was the confrontation with the Soviet Union. Even with high taxes on ordinary people at that time, it was still not enough, and massive government debt was needed for military research and development. Moreover, private capital supported a large number of "military-to-civilian" technologies during the Cold War, recycling investments through technological iterations. The United States eventually won the Cold War, and everything else was secondary. The key was being technologically ahead.
The Soviet Union did not have the ability to do this and could only rely on oil. After oil prices collapsed, they couldn't continue, and they were left with no cards to play against the United States.
So, is government borrowing for development something that every country can do?
Not really.
Take Argentina, for example. They have been borrowing money all along, but they can't repay it. After a few years, the country goes bankrupt, defaults on its debt, and the next time they try to borrow, the interest rates become very high, and they still can't repay it, leading to more bankruptcy.
Now it has become a habitual bankruptcy, and whoever lends money to Argentina should expect to be defaulted on. The same goes for several other countries like Brazil, Turkey, Sri Lanka, and so on. You might think Argentina is quite extreme, with a bunch of worthless currencies that are worth less than scrap paper, changing every few years.
This also shows one thing: borrowing money is an "appendage" of development. If you are weak in development, borrowing money may not solve the problem and may even lead to a disastrous outcome.
In fact, the same applies to individuals. Those who have money are often the ones with the most debt, mainly because they earn a lot of money, have sufficient cash flow, and are not afraid of owing a lot of money. They earn while owing, and they owe while repaying.
Ordinary people who lack sufficient cash flow often borrow money and are more likely to become defaulters.
What about domestic debt? Borrowing money from your own people shouldn't be affected, right?
It's the same.
If the economy continues to develop and there is incremental growth every year, the government can borrow from the people, and after a few years, when the economy develops well and the economic pie grows larger, the government can collect more taxes and repay the debt with interest. The country can use debt for emergencies, and the people can invest in government bonds to earn some money and enjoy the benefits of development. This is a virtuous cycle.
Conversely, if economic growth is not good, and the government continues to borrow on a large scale, what will happen after a few years?
At that time, if you can't repay, you can only borrow more, and in the end, you won't be able to repay at all.
The only solution at that time is to print money to repay the debt. The essence of printing money is to plunder the money of those who are the most honest and hardworking in the country, diluting the money they have in the bank.
Now everyone understands that the act of the government issuing government bonds itself does not cause inflation because the amount of money does not increase or decrease, it just shifts.
The real problem is that all governments in the world have the temptation to secretly print money to dilute their debts. That's why when a government has a high fiscal deficit, inflation often follows.
Just look at the U.S. dollar. Since the establishment of the Federal Reserve in 1913, the purchasing power of the U.S. dollar has lost 95%.
Of course, when I mention the U.S. dollar, it's just an example. Looking at it from a global perspective, the U.S. dollar losing 95% of its value in a hundred years may seem outrageous, but it's actually considered to be performing exceptionally well. Most countries don't have a problem with depreciation; their currencies simply can't last that long.
Other economies often lose this much value in twenty or thirty years. In recent years, some extreme countries have seen their sovereign currencies devalue by about ten times in three or four years.
In the past couple of years, the United States has been printing money like crazy, and it seems that the status of the U.S. dollar remains strong, while the currencies of other countries have depreciated against the dollar, indicating that people around the world are voting with their feet to hold onto the U.S. dollar. Mainly because compared to other economies, the U.S. hasn't printed as much money as people imagine.
As for those who say that the U.S. dollar has a high interest rate, so people are willing to hold it, Russia has a benchmark interest rate of 15%, and people don't hold the ruble, so interest rates are not the key.
Four, Conclusion
Originally, I wanted to discuss the recent issuance of one trillion yuan in government bonds, but then I realized there wasn't much to discuss, so I delved deeper into the topic to make this article worth reading for a long time.
Many people ask if issuing bonds will cause inflation?
As mentioned earlier, simply issuing bonds will not cause inflation. It mainly depends on the future economic situation, whether there will be borrowing to repay existing debts, and whether the growth of debt exceeds the growth of tax revenue.
It's like if you earn money at a much slower rate than you borrow money, what would you do if you had the superpower to print money?
In fact, since the advent of fiat currency, moderate inflation has been an inseparable part of it. There's nothing that can be done about it; it's an unfortunate reality. Governments with restraint print less money, while governments without limits have no bottom line, like Venezuela.
Most of the time, governments are just trying to deal with emergencies and "make the people suffer a little." Sometimes, suffering is enough to get through, but sometimes it's not, and then you have to keep suffering, and hyperinflation destroys the economy. When people realize that saving money is being plundered, they stop saving money, start dumping their own currency, and essentially short their own country's currency, making it impossible to recover.
Hyperinflation doesn't necessarily require printing a lot of money. Once it reaches a certain point and people realize that they absolutely cannot hold any currency in their hands, that currency is finished. Of course, I won't discuss things like the "Little Ice Age" here, which is a matter of fiscal analysis, not the "Little Ice Age."
The key to the government bond system is efficiency. When Zuo Zongtang was determined to defend Xinjiang, if the Qing Dynasty had not borrowed money directly from Western banks but instead squeezed the last bit of silver from the people's pockets and sent it to the capital to purchase weapons from the West, by the time the weapons arrived in China after crossing the ocean, Xinjiang might have been lost, and Gansu might have been lost as well. Moreover, that kind of extreme squeezing for tax collection might have caused the just suppressed Taiping Rebellion to rise again.
In other words, when a country borrows money from big businessmen to wage war or do something, it is possibly the most efficient operation with the least impact on the people.
Three
The United States learned this system of government bonds and laid the foundation for its subsequent rise against the odds.
Just a hundred years before the "debate over coastal defense and border defense" in the Qing Dynasty, in the fifty-second year of the Qianlong Emperor's reign, something happened on the other side of the ocean.
The American states that had driven out the British found that they couldn't get by on their own. After fighting for eight years, they were in debt and when it was time to repay the debt, they found it too painful and couldn't continue. Representatives from all the states gathered in Philadelphia for the First Continental Congress to discuss a solution to this problem.
At that time, the gentlemen were mentally prepared to default on their debts as soon as the country was established.
Later, under the promotion of Alexander Hamilton, the U.S. government decided to insist on repaying the debt. During the meeting, they also discussed several historical issues, which were later considered a united and victorious congress, many years later becoming a key topic for elementary school students in the United States, known as the Constitutional Convention.
In fact, Hamilton had a deeper plan. If they defaulted on their debts as soon as the country was established, they would never be able to borrow money again.
If they didn't default, they could not only borrow to repay existing debts but also borrow money for development and slowly repay the debt later, just like the Dutch with their perpetual bonds, only repaying the interest.
This national strategy had a tremendous impact on the United States in the following three battles for national destiny.
The first battle was the Civil War.
The Civil War in the United States was roughly synchronized with the Taiping Rebellion in China. Both wars lacked strategic planning and were simply a matter of sacrificing lives on both sides. The Xiang Army played the "python encircling the city" strategy, and due to insufficient military pay, they would often massacre cities after capturing them. The Civil War in the United States was a battle of attrition between the North and the South, with the North using brutal casualties to wear down the South. After capturing a southern city, they would burn it to the ground, completely cutting off the South's war potential.
The South did not have a financial market or a government bond system, so they resorted to excessive issuance of paper money. Later, the inflation rate reached 1800%, and they finally couldn't hold on and collapsed.
The Northern Federal government issued government bonds through Wall Street, allowing ordinary people and the wealthy to contribute money to the war effort. It also attracted overseas investors to purchase government bonds, and in the end, the North exhausted the South. If it weren't for Hamilton's decision at the beginning, the United States might have been completely finished after the Civil War and returned to being a small agrarian society in the South.
The second battle was World War II. In fact, the movie "Flags of Our Fathers" is about this. At that time, war heroes were touring like actors, calling on everyone to buy government bonds, otherwise the government would not have the money to build warships.
The third battle was the confrontation with the Soviet Union. Even with high taxes on ordinary people at that time, it was still not enough, and massive government debt was needed for military research and development. Moreover, private capital supported a large number of "military-to-civilian" technologies during the Cold War, recycling investments through technological iterations. The United States eventually won the Cold War, and everything else was secondary. The key was being technologically ahead.
The Soviet Union did not have the ability to do this and could only rely on oil. After oil prices collapsed, they couldn't continue, and they were left with no cards to play against the United States.
So, is government borrowing for development something that every country can do?
Not really.
Take Argentina, for example. They have been borrowing money all along, but they can't repay it. After a few years, the country goes bankrupt, defaults on its debt, and the next time they try to borrow, the interest rates become very high, and they still can't repay it, leading to more bankruptcy.
Now it has become a habitual bankruptcy, and whoever lends money to Argentina should expect to be defaulted on. The same goes for several other countries like Brazil, Turkey, Sri Lanka, and so on. You might think Argentina is quite extreme, with a bunch of worthless currencies that are worth less than scrap paper, changing every few years.
This also shows one thing: borrowing money is an "appendage" of development. If you are weak in development, borrowing money may not solve the problem and may even lead to a disastrous outcome.
In fact, the same applies to individuals. Those who have money are often the ones with the most debt, mainly because they earn a lot of money, have sufficient cash flow, and are not afraid of owing a lot of money. They earn while owing, and they owe while repaying.
Ordinary people who lack sufficient cash flow often borrow money and are more likely to become defaulters.
What about domestic debt? Borrowing money from your own people shouldn't be affected, right?
It's the same.
If the economy continues to develop and there is incremental growth every year, the government can borrow from the people, and after a few years, when the economy develops well and the economic pie grows larger, the government can collect more taxes and repay the debt with interest. The country can use debt for emergencies, and the people can invest in government bonds to earn some money and enjoy the benefits of development. This is a virtuous cycle.
Conversely, if economic growth is not good, and the government continues to borrow on a large scale, what will happen after a few years?
At that time, if you can't repay, you can only borrow more, and in the end, you won't be able to repay at all.
The only solution at that time is to print money to repay the debt. The essence of printing money is to plunder the money of those who are the most honest and hardworking in the country, diluting the money they have in the bank.
Now everyone understands that the act of the government issuing government bonds itself does not cause inflation because the amount of money does not increase or decrease, it just shifts.
The real problem is that all governments in the world have the temptation to secretly print money to dilute their debts. That's why when a government has a high fiscal deficit, inflation often follows.
Just look at the U.S. dollar. Since the establishment of the Federal Reserve in 1913, the purchasing power of the U.S. dollar has lost 95%.
Of course, when I mention the U.S. dollar, it's just an example. Looking at it from a global perspective, the U.S. dollar losing 95% of its value in a hundred years may seem outrageous, but it's actually considered to be performing exceptionally well. Most countries don't have a problem with depreciation; their currencies simply can't last that long.
Other economies often lose this much value in twenty or thirty years. Just in the past few years, some extreme countries have seen their sovereign currencies devalue by about ten times in three or four years.
In recent years, the United States has been printing money like crazy, and it seems that the status of the U.S. dollar remains strong, while the currencies of other countries have depreciated against the dollar, indicating that people around the world are voting with their feet to hold onto the U.S. dollar. Mainly because compared to other economies, the U.S. hasn't printed as much money as people imagine.
As for those who say that the U.S. dollar has a high interest rate, so people are willing to hold it, Russia has a benchmark interest rate of 15%, and people don't hold the ruble, so interest rates are not the key.
Four, Conclusion
Originally, I wanted to discuss the recent issuance of one trillion yuan in government bonds, but then I realized there wasn't much to discuss, so I delved deeper into the topic to make this article worth reading for a long time.
Many people ask if issuing bonds will cause inflation?
As mentioned earlier, simply issuing bonds will not cause inflation. It mainly depends on the future economic situation, whether there will be borrowing to repay existing debts, and whether the growth of debt exceeds the growth of tax revenue.
It's like if you earn money at a much slower rate than you borrow money, what would you do if you had the superpower to print money?
In fact, since the advent of fiat currency, moderate inflation has been an inseparable part of it. There's nothing that can be done about it; it's an unfortunate reality. Governments with restraint print less money, while governments without limits have no bottom line, like Venezuela.
Most of the time, governments are just trying to deal with emergencies and "make the people suffer a little." Sometimes, suffering is enough to get through, but sometimes it's not, and then you have to keep suffering, and hyperinflation destroys the economy. When people realize that saving money is being plundered, they stop saving money, start dumping their own currency, and essentially short their own country's currency, making it impossible to recover.
Hyperinflation doesn't necessarily require printing a lot of money. Once it reaches a certain point and people realize that they absolutely cannot hold any currency in their hands, that currency is finished. Of course, I won't discuss things like the "Little Ice Age" here, which is a matter of fiscal analysis, not the "Little Ice Age."
The key to the government bond system is efficiency. When Zuo Zongtang was determined to defend Xinjiang, if the Qing Dynasty had not borrowed money directly from Western banks but instead squeezed the last bit of silver from the people's pockets and sent it to the capital to purchase weapons from the West, by the time the weapons arrived in China after crossing the ocean, Xinjiang might have been lost, and Gansu might have been lost as well. Moreover, that kind of extreme squeezing for tax collection might have caused the just suppressed Taiping Rebellion to rise again.
In other words, when a country borrows money from big businessmen to wage war or do something, it is possibly the most efficient operation with the least impact on the people.
Three
The United States learned this system of government bonds and laid the foundation for its subsequent rise against the odds.
Just a hundred years before the "debate over coastal defense and border defense" in the Qing Dynasty, in the fifty-second year of the Qianlong Emperor's reign, something happened on the other side of the ocean.
The American states that had driven out the British found that they couldn't get by on their own. After fighting for eight years, they were in debt and when it was time to repay the debt, they found it too painful and couldn't continue. Representatives from all the states gathered in Philadelphia for the First Continental Congress to discuss a solution to this problem.
At that time, the gentlemen were mentally prepared to default on their debts as soon as the country was established.
Later, under the promotion of Alexander Hamilton, the U.S. government decided to insist on repaying the debt. During the meeting, they also discussed several historical issues, which were later considered a united and victorious congress, many years later becoming a key topic for elementary school students in the United States, known as the Constitutional Convention.
In fact, Hamilton had a deeper plan. If they defaulted on their debts as soon as the country was established, they would never be able to borrow money again.
If they didn't default, they could not only borrow to repay existing debts but also borrow money for development and slowly repay the debt later, just like the Dutch with their perpetual bonds, only repaying the interest.
This national strategy had a tremendous impact on the United States in the following three battles for national destiny.
The first battle was the Civil War.
The Civil War in the United States was roughly synchronized with the Taiping Rebellion in China. Both wars lacked strategic planning and were simply a matter of sacrificing lives on both sides. The Xiang Army played the "python encircling the city" strategy, and due to insufficient military pay, they would often massacre cities after capturing them. The Civil War in the United States was a battle of attrition between the North and the South, with the North using brutal casualties to wear down the South. After capturing a southern city, they would burn it to the ground, completely cutting off the South's war potential.
The South did not have a financial market or a government bond system, so they resorted to excessive issuance of paper money. Later, the inflation rate reached 1800%, and they finally couldn't hold on and collapsed.
The Northern Federal government issued government bonds through Wall Street, allowing ordinary people and the wealthy to contribute money to the war effort. It also attracted overseas investors to purchase government bonds, and in the end, the North exhausted the South. If it weren't for Hamilton's decision at the beginning, the United States might have been completely finished after the Civil War and returned to being a small agrarian society in the South.
The second battle was World War II. In fact, the movie "Flags of Our Fathers" is about this. At that time, war heroes were touring like actors, calling on everyone to buy government bonds, otherwise the government would not have the money to build warships.
The third battle was the confrontation with the Soviet Union. Even with high taxes on ordinary people at that time, it was still not enough, and massive government debt was needed for military research and development. Moreover, private capital supported a large number of "military-to-civilian" technologies during the Cold War, recycling investments through technological iterations. The United States eventually won the Cold War, and everything else was secondary. The key was being technologically ahead.
The Soviet Union did not have the ability to do this and could only rely on oil. After oil prices collapsed, they couldn't continue, and they were left with no cards to play against the United States.
So, is government borrowing for development something that every country can do?
Not really.
Take Argentina, for example. They have been borrowing money all along, but they can't repay it. After a few years, the country goes bankrupt, defaults on its debt, and the next time they try to borrow, the interest rates become very high, and they still can't repay it, leading to more bankruptcy.
Now it has become a habitual bankruptcy, and whoever lends money to Argentina should expect to be defaulted on. The same goes for several other countries like Brazil, Turkey, Sri Lanka, and so on. You might think Argentina is quite extreme, with a bunch of worthless currencies that are worth less than scrap paper, changing every few years.
This also shows one thing: borrowing money is an "appendage" of development. If you are weak in development, borrowing money may not solve the problem and may even lead to a disastrous outcome.
In fact, the same applies to individuals. Those who have money are often the ones with the most debt, mainly because they earn a lot of money, have sufficient cash flow, and are not afraid of owing a lot of money. They earn while owing, and they owe while repaying.
Ordinary people who lack sufficient cash flow often borrow money and are more likely to become defaulters.
What about domestic debt? Borrowing money from your own people shouldn't be affected, right?
It's the same.
If the economy continues to develop and there is incremental growth every year, the government can borrow from the people, and after a few years, when the economy develops well and the economic pie grows larger, the government can collect more taxes and repay the debt with interest. The country can use debt for emergencies, and the people can invest in government bonds to earn some money and enjoy the benefits of development. This is a virtuous cycle.
Conversely, if economic growth is not good, and the government continues to borrow on a large scale, what will happen after a few years?
At that time, if you can't repay, you can only borrow more, and in the end, you won't be able to repay at all.
The only solution at that time is to print money to repay the debt. The essence of printing money is to plunder the money of those who are the most honest and hardworking in the country, diluting the money they have in the bank.
Now everyone understands that the act of the government issuing government bonds itself does not cause inflation because the amount of money does not increase or decrease, it just shifts.
The real problem is that all governments in the world have the temptation to secretly print money to dilute their debts. That's why when a government has a high fiscal deficit, inflation often follows.
Just look at the U.S. dollar. Since the establishment of the Federal Reserve in 1913, the purchasing power of the U.S. dollar has lost 95%.
Of course, when I mention the U.S. dollar, it's just an example. Looking at it from a global perspective, the U.S. dollar losing 95% of its value in a hundred years may seem outrageous, but it's actually considered to be performing exceptionally well. Most countries don't have a problem with depreciation; their currencies simply can't last that long.
Other economies often lose this much value in twenty or thirty years. Just in the past few years, some extreme countries have seen their sovereign currencies devalue by about ten times in three or four years.
These past few years, the United States has been printing money like crazy, and it seems that the status of the U.S. dollar remains strong, while the currencies of other countries have depreciated against the dollar, indicating that people around the world are voting with their feet to hold onto the U.S. dollar. Mainly because compared to other economies, the U.S. hasn't printed as much money as people imagine.
As for those who say that the U.S. dollar has a high interest rate, so people are willing to hold it, Russia has a benchmark interest rate of 15%, and people don't hold the ruble, so interest rates are not the key.
Four, Conclusion
Originally, I wanted to discuss the recent issuance of one trillion yuan in government bonds, but then I realized there wasn't much to discuss, so I delved deeper into the topic to make this article worth reading for a long time.
Many people ask if issuing bonds will cause inflation?
As mentioned earlier, simply issuing bonds will not cause inflation. It mainly depends on the future economic situation, whether there will be borrowing to repay existing debts, and whether the growth of debt exceeds the growth of tax revenue.
It's like if you earn money at a much slower rate than you borrow money, what would you do if you had the superpower to print money?
In fact, since the advent of fiat currency, moderate inflation has been an inseparable part of it. There's nothing that can be done about it; it's an unfortunate reality. Governments with restraint print less money, while governments without limits have no bottom line, like Venezuela.
Most of the time, governments are just trying to deal with emergencies and "make the people suffer a little." Sometimes, suffering is enough to get through, but sometimes it's not, and then you have to keep suffering, and hyperinflation destroys the economy. When people realize that saving money is being plundered, they stop saving money, start dumping their own currency, and essentially short their own country's currency, making it impossible to recover.
Hyperinflation doesn't necessarily require printing a lot of money. Once it reaches a certain point and people realize that they absolutely cannot hold any currency in their hands, that currency is finished. Of course, I won't discuss things like the "Little Ice Age" here, which is a matter of fiscal analysis, not the "Little Ice Age."
The key to the government bond system is efficiency. When Zuo Zongtang was determined to defend Xinjiang, if the Qing Dynasty had not borrowed money directly from Western banks but instead squeezed the last bit of silver from the people's pockets and sent it to the capital to purchase weapons from the West, by the time the weapons arrived in China after crossing the ocean, Xinjiang might have been lost, and Gansu might have been lost as well. Moreover, that kind of extreme squeezing for tax collection might have caused the just suppressed Taiping Rebellion to rise again.
In other words, when a country borrows money from big businessmen to wage war or do something, it is possibly the most efficient operation with the least impact on the people.
Three
The United States learned this system of government bonds and laid the foundation for its subsequent rise against the odds.
Just a hundred years before the "debate over coastal defense and border defense" in the Qing Dynasty, in the fifty-second year of the Qianlong Emperor's reign, something happened on the other side of the ocean.
The American states that had driven out the British found that they couldn't get by on their own. After fighting for eight years, they were in debt and when it was time to repay the debt, they found it too painful and couldn't continue. Representatives from all the states gathered in Philadelphia for the First Continental Congress to discuss a solution to this problem.
At that time, the gentlemen were mentally prepared to default on their debts as soon as the country was established.
Later, under the promotion of Alexander Hamilton, the U.S. government decided to insist on repaying the debt. During the meeting, they also discussed several historical issues, which were later considered a united and victorious congress, many years later becoming a key topic for elementary school students in the United States, known as the Constitutional Convention.
In fact, Hamilton had a deeper plan. If they defaulted on their debts as soon as the country was established, they would never be able to borrow money again.
If they didn't default, they could not only borrow to repay existing debts but also borrow money for development and slowly repay the debt later, just like the Dutch with their perpetual bonds, only repaying the interest.
This national strategy had a tremendous impact on the United States in the following three battles for national destiny.
The first battle was the Civil War.
The Civil War in the United States was roughly synchronized with the Taiping Rebellion in China. Both wars lacked strategic planning and were simply a matter of sacrificing lives on both sides. The Xiang Army played the "python encircling the city" strategy, and due to insufficient military pay, they would often massacre cities after capturing them. The Civil War in the United States was a battle of attrition between the North and the South, with the North using brutal casualties to wear down the South. After capturing a southern city, they would burn it to the ground, completely cutting off the South's war potential.
The South did not have a financial market or a government bond system, so they resorted to excessive issuance of paper money. Later, the inflation rate reached 1800%, and they finally couldn't hold on and collapsed.
The Northern Federal government issued government bonds through Wall Street, allowing ordinary people and the wealthy to contribute money to the war effort. It also attracted overseas investors to purchase government bonds, and in the end, the North exhausted the South. If it weren't for Hamilton's decision at the beginning, the United States might have been completely finished after the Civil War and returned to being a small agrarian society in the South.
The second battle was World War II. In fact, the movie "Flags of Our Fathers" is about this. At that time, war heroes were touring like actors, calling on everyone to buy government bonds, otherwise the government would not have the money to build warships.
The third battle was the confrontation with the Soviet Union. Even with high taxes on ordinary people at that time, it was still not enough, and massive government debt was needed for military research and development. Moreover, private capital supported a large number of "military-to-civilian" technologies during the Cold War, recycling investments through technological iterations. The United States eventually won the Cold War, and everything else was secondary. The key was being technologically ahead.
The Soviet Union did not have the ability to do this and could only rely on oil. After oil prices collapsed, they couldn't continue, and they were left with no cards to play against the United States.
So, is government borrowing for development something that every country can do?
Not really.
Take Argentina, for example. They have been borrowing money all along, but they can't repay it. After a few years, the country goes bankrupt, defaults on its debt, and the next time they try to borrow, the interest rates become very high, and they still can't repay it, leading to more bankruptcy.
Now it has become a habitual bankruptcy, and whoever lends money to Argentina should expect to be defaulted on. The same goes for several other countries like Brazil, Turkey, Sri Lanka, and so on. You might think Argentina is quite extreme, with a bunch of worthless currencies that are worth less than scrap paper, changing every few years.
This also shows one thing: borrowing money is an "appendage" of development. If you are weak in development, borrowing money may not solve the problem and may even lead to a disastrous outcome.
In fact, the same applies to individuals. Those who have money are often the ones with the most debt, mainly because they earn a lot of money, have sufficient cash flow, and are not afraid of owing a lot of money. They earn while owing, and they owe while repaying.
Ordinary people who lack sufficient cash flow often borrow money and are more likely to become defaulters.
What about domestic debt? Borrowing money from your own people shouldn't be affected, right?
It's the same.
If the economy continues to develop and there is incremental growth every year, the government can borrow from the people, and after a few years, when the economy develops well and the economic pie grows larger, the government can collect more taxes and repay the debt with interest. The country can use debt for emergencies, and the people can invest in government bonds to earn some money and enjoy the benefits of development. This is a virtuous cycle.
Conversely, if economic growth is not good, and the government continues to borrow on a large scale, what will happen after a few years?
At that time, if you can't repay, you can only borrow more, and in the end, you won't be able to repay at all.
The only solution at that time is to print money to repay the debt. The essence of printing money is to plunder the money of those who are the most honest and hardworking in the country, diluting the money they have in the bank.
Now everyone understands that the act of the government issuing government bonds itself does not cause inflation because the amount of money does not increase or decrease, it just shifts.
The real problem is that all governments in the world have the temptation to secretly print money to dilute their debts. That's why when a government has a high fiscal deficit, inflation often follows.
Just look at the U.S. dollar. Since the establishment of the Federal Reserve in 1913, the purchasing power of the U.S. dollar has lost 95%.
Of course, when I mention the U.S. dollar, it's just an example. Looking at it from a global perspective, the U.S. dollar losing 95% of its value in a hundred years may seem outrageous, but it's actually considered to be performing exceptionally well. Most countries don't have a problem with depreciation; their currencies simply can