I’ve been reading and trying to understand Ray Dalio’s articles recently (The World Has Gone Mad and the System Is Broken). Here is my takeaway from it (as someone who has never taken an economics course):
People generally want their government to provide more for them. Governments must work to appease the voters and anyway naturally want to grow themselves. So they borrow money by issuing bonds which allows them to spend more. Voters are happy with this.
However, at some point, it doesn’t make sense for rational actors (e.g. private investors) to lend to the government by buying the bonds e.g. when interest rates are negative, or lower than expected inflation. This limits how much the government is able to borrow.
But government debt doesn’t exist in an efficient market. Central banks are capable of creating money and don’t need to make a profit; they don’t have the same constraints as private investors. The central bank prints money to buy bonds as necessary. They will always do this because they are effectively government entities.
Because the amount of money expands, assets that are not tied to currencies or bonds become more valuable (e.g. stocks, gold, Bitcoin, real estate). People who own these assets become richer and people who don’t become poorer (increased inequality). Ultimately there will be a breaking point of some kind e.g. a revolution, an abandonment of fiat currency, or a large scale wealth redistribution scheme.
The above theory applies to US, UK, Europe, which basically follow the same program. In the case of South Africa, the situation is different because they’re a small player in the global economy and money printing is kept in check by means of the forex exchange rate.