Debt and growth

Debt is a source of financing that governments, individuals and companies are all using. Debt is also possible to create multiply effect for governments and individuals as we know the money supplied by central banks will create multiply effects in the economy and the money is sometimes supplied in a form of debt. Debt is an effective source of finance to minimize the opportunity costs. Although opportunity costs always exit, borrowing debts can minimize the probability of opportunity costs greater than expected returns.

For companies, the level of debt changes over their development. Once a company is newly established, its investors are relatively conservative at lending too much money, as investing in such firm is already a risky action. When a company is expanding and performing well, its level of debt is also increasing over time, as investing in these companies has higher expected returns (relatively higher returns and lower risk). When a company is mature, its level of debt is likely to slow down or even decline, as its growth potential disappears, investors are only looking forward to constant returns and do not want these mature companies to conduct some risky adventure. 

I think that this rule may also apply to governments. The level of debt depends on the government tax incomes as well as its economy's performance. From this point of view, when an economy is expanding at a rapid rate, it is normal for its government to increase its public debt level. Higher levels of public debt are highly likely to generate further economic growth. However, we should not expect increasing public debt would have an over 100% multiply effect, though it is possible. Overestimating multiply effect of public effect could lead to sharp increasing in the public debt level, and increase the risk of default in the future once the economy cannot generate sufficient growth. Therefore, it is more reasonable to limit the increase rate in the public debt level below the nominal economic growth level. However, this is not always the case. Depreciation becomes another way to lower the real value of debts which are borrowed from foreigners.

Overall, it is not surprising to see that economies with strong growth rates have higher public debt increasing rates. However, higher public debt levels could lead to sharp depreciation of one country’s currency, and this prevent the currency from being the globally acceptable currency.