Final answer:
Public debt has a negative relationship with long-term economic growth and can lead to reduced investor confidence, difficulties in borrowing, and potential economic stagnation or decline. Governments manage debt through instruments like bonds and by redistributing funds via taxation. Debt owed to foreign entities results in a true loss of national purchasing power.
Step-by-step explanation:
The consequences of public debt can be significant and multifaceted. Economic literature often suggests a negative relationship between sustained deficits, high levels of government debt, and long-term economic growth. Over time, if a nation's economy is strained by debt or experiences collapse, investor confidence can diminish, resulting in difficulties for the government to borrow money through the sale of bonds. Instances such as Detroit and Puerto Rico indicate how public debt can lead to restructuring or default, which in turn affects future borrowing credibility. However, it's essential to note that a government owning debt to itself, primarily through bonds like Treasury bonds, notes, and bills, has a different impact compared to private debt. The government can manage debt by issuing more bonds and adjusting taxes, redistributing funds internally. The debt owed to foreign entities, which accounts for a portion of U.S. debt, represents a true loss of purchasing power as this outflow is diverted from the national economy.
Historical patterns, such as the U.S. experience from the end of World War II to ~1980, show that it is possible for a nation to run budget deficits while still reducing the debt/GDP ratio provided economic growth outpaces debt accumulation. However, this assumes controlled deficits and robust GDP growth. Additionally, sustained deficits cumulating into substantial debt can present risks of hyperinflation, currency collapse, and possible long-term stagnation or decline of the economy.