A government security is money owed to an investor by a government. The aggregate total of all government securities forms a country’s national debt. Governments borrow money to finance a variety of initiatives, including wars and social programs. The debt can be issued to individuals or corporations, domestic or foreign.
British economist John Maynard Keynes advocated using the government security as a means of investing in an economy during times of recession. Keynes claimed that a moderately high level of government spending on infrastructure projects, funded by issuing government securities, would encourage consumer confidence in an economy. This confidence would lead to greater consumer spending, which would spur economic growth. Thus, the debt incurred by government spending could be paid for with the tax revenues of later prosperity. Many governments adopted Keynes’ model in the 1930s and following decades.
An individual investor is typically attracted to the government security because of its perceived stability—a treasury bond or other type of government security is often considered to be a risk-free form of investment. This is because governments do not ordinarily become insolvent and unable to pay off their debts. Since a government security involves relatively low risk, however, it will generally not generate a very high rate of interest.
Insolvency occasionally does happen, however, when wars, social instability or fiscal mismanagement occur. Economic crises under these circumstances are typically associated with hyperinflation, which is when a currency rapidly loses its value. Consumers in the economy soon lose confidence in the currency and will refuse to accept it as a form of payment. This activity serves to further undermine the legitimacy of the currency. Since a government security is based on its own currency, it is not actually an investment completely free of risk.
The scale of national debt can be a significant portion of, or even larger than, the gross domestic product (GDP) of a country. The GDP is a measure of the total amount of production within the borders of a nation and is a commonly-used metric of economic strength. Governments with high GDPs are able to finance large infrastructure projects, extensive social programs and large militaries. The national debt of the United States during the late 2000s was only slightly less than its GDP. The debt of Japan, however, was nearly twice its GDP.
Investors need not be citizens of a country to obtain a government security. Bonds can be issued to foreign individuals, organizations or governments. When this happens, it is known as external debt. Some critics have argued that too high an external debt is unsustainable. To prevent this, a number of indicators have been developed to characterize the level of external debt. Of particular concern is the external debt of developing nations, which often lack the infrastructure to generate revenue and pay off foreign investors in the long term.