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Government Debt Explained

By Phin Upham

The role of government, and government debt, is the subject of much political debate in America. Americans are rightly concerned about public debt and its potential effect on future generations. There are extremes to both sides, so the question becomes: what is the real role of government debt? Is debt something to be avoided at all costs, or is the government more useful than we might believe?

The Pessimists View

Ask a debt pessimist about the direction this country is taking and you’re likely to get an answer focused around the state we are leaving to future generations. Pessimists believe that rising public debt is ultimately unsustainable, and they advocate for explicit default. As opposed to implicit default, explicit default would set limits on the level of borrowing that can occur. It would also define interest rates.

Pessimists also argue that limiting the size of government is the true solution.

This opposes the optimist view that government serves a necessary function in modern society. Optimists argue that spending during a deficit helps to boost the economy, like Roosevelt’s New Deal. They might argue for bail outs or increased public works projects while margins are tight, because they believe spending can stimulate economic activity.

Both sides present some points that have merit. Government debt can quickly spiral out of control, which is part of what makes checks and balances so important in our system. Government can’t simply vanish overnight, or many of the benefits enjoyed by people of all income levels would quickly disappear. Government debt is necessary, but the extent of that debt is very much up for debate.


About the Author: Phin Upham is an investor at a family office/ hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media and Telecom group. You may contact Phin on his Phin Upham website or LinkedIn page.