Final answer:
Large debts can lead to economic hardship when funds are not used to boost productivity, causing difficulties in repayment and potential default. Excessive budget deficits can also result in high inflation and a lack of investor confidence, leading to reduced investment and economic decline.
Step-by-step explanation:
Problems Arising from Large Debts
Excessive borrowing can lead to significant economic problems for a country, manifesting in various forms of financial distress. When countries acquire substantial amounts of debt, particularly from foreign entities, and do not invest these funds in ways that increase productivity, they may struggle to repay the loans. This can result in heavy interest payments and stagnation, as seen in several Latin American and African countries during the 1970s and 1980s.
Additionally, very large budget deficits can drive aggregate demand excessively to the right, triggering high levels of inflation. Historical examples include Turkey's high double-digit inflation rates due to large deficits. Moreover, persistent budget deficits can lead to fears that the government might default on its loans. Countries like Turkey, Brazil, Venezuela, and Argentina have all experienced multiple defaults over the past centuries, affecting investor confidence and potentially leading to a rapid withdrawal of international investments.
This withdrawal can have devastating effects on a nation's economy, including reduced investment, a depreciated exchange rate, bank failures, and deep recessions. Therefore, the risks associated with large debt accumulation and budget deficits are significant, impacting both the borrowing nation’s economic growth and the global financial market's stability.