This is a trading forum and I have a one track mind: To make money trading. I am speaking as a currency trader, trading foreign currency for a living. What should I watch out for in order to make money if your thesis is the correct one?
In terms of government debt I developed a National Investment Analysis called Morganist National Investment Analysis. The technique looked at the standard deviation and mean average of the government deficits of the member states of the European Union over a ten year period. The technique accurately predicted which member states would enter financial difficulty. I will link to an article below that I wrote that explains the process, which was developed to assess the financial difficulties during the Euro Crisis, in the book 'Euro Crisis - Aggregate Demand Control is European Single Currency Weakness. I will also link to the supporting data on my website, which is available for you to view for free. http://morganisteconomics.blogspot.com/2011/11/tip-on-national-investment-analysis.html?q=a+tip http://morganisteconomics.blogspot.com/2012/06/euro-crisis-which-countries-will-need.html?q=a+tip Scroll down the page to get to Euro Crisis book statistics. http://morganisteconomics.blogspot.com/p/euro-crisis.html?q=a+tip
I'm not directly interested in this at the moment. Unless you can understand deficits, bonds and so-called "debt" correctly you can't understand how absurd statements regarding paying down the debt, or worries about passing down debt to future generations, etc., are. Most people equate the rules constraining government finances with those constraining personal finances. Even some otherwise competent economists have a tendency to do this. It is entirely incorrect to equate the rules of personal finances to the rules of government finances, because government is the source of money. Once you get a money machine in your basement and just turn the crank whenever you need money, you'll stop worrying about "debt" and start worrying about what constraints there might be on how fast you should turn the crank, and under what circumstances you might be better off if you turned the crank backwards a few turns.
That's a good question. When you get the answer please pass it on to me. I can tell you though that a good understanding of money, government finances and banking should be a great help if you are a forex trader. It will also help you understand the unique EU monetary union's problem and what they could do to solve the problem. George Soros wouldn't have known that the British pound would have to be devalued unless he correctly understood money. He has a background in economics (LSE) and in banking. (The pound, at that time ~1964, was commodity based. But the basic principles are unchanged. It is just that fiat money is far more flexible and accommodating, so there exists the flexibility to have a little inflation gradually and avoid, if its well managed, a big scary (~14%) all-at-once devaluation.)
I am not interested in paying down the debt I want to outgrow it. If the government debt or deficit increases it will lead to consequences for the currency when it trades. This is something that cannot be ignored because the currency price determines the ability to buy and sell goods internationally. Holding a high government debt no matter how you view it will impact the currency and the ability to obtain or sell goods. I am not equating government finances to personal finances. People don't have their own currency that is traded on an exchange so their ability to maintain the purchasing power of their own money is not impacted by the debt they hold. Governments on the other hand have to maintain balances and hit targets to maintain the value of their currency to be able to use it to trade with other countries.
Your sentiment is noble. But a bit wrong headed. Apparently you have recently discovered that there is a an international market for currencies that determines their current relative value one to another, and you've become fixated on that. Somehow you've got the idea that this "forex" market determines the value of a currency. But this is wrong. The forex market reflects the relative perceived future value of currencies and the current demand for 'this' currency over 'that' currency, as needed for international commerce and banking. Banks are the main participants. The actual value of a currency is a function of more fundamental measures, chiefly what a unit of the currency can be exchanged for. In other words, on the other side of the true value relationship are goods and services rather than another currency. This is why a nations productivity relative to the units of its currency in circulation is ultimately at the bottom of the forex market which reflects perceived value relative to another currency. Any auction market can produces prices very far removed from fundamental values. And the majority of the time prices in auction markets are far removed from any evaluation based on fundamentals. The equities market would be a prime example. In it, prices are nearly always far removed from rational value. Consequently, there is great risk of the market 'correcting' suddenly and without notice. This is true of the huge forex market as well, but perhaps somewhat less so because the major participants tend to be better informed. (Major Banks have economists on their staff who are experts in the evaluation of currencies.) Nevertheless all auction markets are subject to price manipulation.
You are viewing the currency value as being based on some form of collateral, rather than seeing it as something that has its own value when it is traded. Another way to see this is to reverse the position of the things you believe have value. The price of any good even tangible goods like gold or silver can also alter and potentially be valueless in a monetary sense. The very concept of money when it is traded on an exchange is that it has this 'monetary' form of value that something is worth a certain currency value to purchase it at. It is this 'monetary' form of value that give the money its trading power and its value as a commodity. This is something that has to be maintained and appreciated as to how it alters to certain market forces. For example if the government debt increases the Forex traders might think it is not worth holding on to too much of the currency because the government will be likely to increase taxation in that country in the future to either pay off the debt or control inflation. The demand to buy the currency will fall and the price it can get on the market will fall. It's 'monetary' value has fallen because of the outside economic factors that determine its value or price. Any collateral resources backing it up are the same but the price to buy has fallen.
But I have done so well on them. I made money from trading the AUD against the USD. And the Hang Seng and Nikkei against the American markets. You can look at the government debt figures to predict future economic outcomes to make long term currency trades. This was proven in my book Euro Crisis and the accompanying articles. The Morganist National Investment Analysis was applied to predict which of the European Union member states would enter financial difficulties next and it was proven right. It is all published and proven.