Negative effects of borrowing

Today I want to talk about the negative effects of borrowing. Yesterday I described how a government could use bonds to continuously generate economic stimulus; however, borrowing bonds could also cause negative effects.

The positive effects of borrowing bonds have one basic fundament that the government has to be able to effectively generate stable economic growth. However, when an economy cannot generate stable economic growth effectively, borrowing bonds may not help to stimulate the economy. In addition, such government usually has to bear high yields (high costs of borrowing), so the government not only is unable to generate effective economic growth, but also is very likely to accumulate very high loans to pay back. Under such circumstance, a government's credit rating is very likely to be lowered and this will further increase the costs of borrowing; the loan burden will accumulate and slow down the economic growth.

Moreover, even some governments with good and healthy economies are not necessarily possible to continue endless bond borrowing process. Because larger amounts of loans usually mean higher level of risks, when a government continues to borrow loans endless, its risk increases significantly; although if the economy does not seem to have any problem, the yield will not increase and the government is able to borrow as many loans as previously, when there is a black swan event or an exogenous risk, the yield will shoot skyhigh and the government may not be able to pay back its loans by its in-declined economy.

Overall, borrowing as much as possible seems desirable in the short term, but significantly increases the risk.