Who does Canada's debt belong to?

Why the younger generation does not have to fear national debt

The catch is, while the first observation is correct, the debt burden is nothing to moan about for the younger generation as a whole. Because she inherits not only the debts of the state, but also the demands on it. This means that tomorrow the young people will pay back to themselves from today. And since the jargon of economists is probably a hindrance when it comes to clarifying these connections, we have put the connections in an example, an analogy.

Franz is thirteen years old and is in the seventh grade. His father is a master craftsman and the business has been going well for the past ten years. Part of the bank loan that the father had to take out years ago was repaid and during the summer vacation the camper went through Canada.

But now the mother has become infected with a virus and has to be hospitalized for weeks. The father takes care of them and temporarily closes the business. As a result, not only does he lose his income, but also his two employees, because he has to fire them.

At the general meeting of the sports club, the father talks about his plight. He learns that the virus is also giving other club members a hard time. Others, on the other hand, are not affected and have so far had secure jobs. You even save more than before because the times are uncertain and you don't know what the future will bring.

Trustworthy Borrowers

Somebody from the assembly has an idea: Those members who are not affected by the crisis lend money to Franz ‘Papa and the others who have been hit by the crisis instead of keeping it in their current account. With this the father can finance rent, wages and other expenses and get through the crisis. That would also help Franz and the children of his father's employees, because then they don't have to forego tutoring and - more importantly - pocket money.

Nevertheless, the father and his friends consider accepting the offer because they do not know whether they will be able to pay the interest and repay the debt in the future. Some families who could give credit are also hesitant because they are unsure whether they will get their money back.

The next idea comes from the club management. Club chairman Merker and treasurer Schlitz always make sure that the club is solidly financed. Now they are proposing that individual members should not lend money to others, but that the association should borrow money from its members. The money should finally be used to modernize the ailing sports hall. This means that the employees of the craft businesses can continue to receive their salaries and the club can have a modern sports hall.

Everyone thinks this is good: savers, because the association is more creditworthy than any individual member; the families affected by the crisis, because they can count on the solidarity of the association's members; and those who do not want to borrow or save more because they know that their income is no longer threatened by the drop in demand from savers and borrowers that the virus is causing. When the general meeting asked for approval, tutor Müller therefore held up his hand particularly high.

So everyone is satisfied. Only Franz suddenly becomes pensive. He heard on television that debts always weigh on the younger generation, including him. It is also immediately clear to him: if he remains a member of the association, he must participate in the repayment of the debts in the future.

Burdens not noticed

The youth warden Kerstin, who has just finished her first semester of economics, reassures him: yes, club members have to repay their debts later; but this payment goes back to club members.

Franz shakes his head uncomprehendingly. But Kerstin explains: Franz, you and all the other young club members, on the one hand you inherit what the club owns, e.g. the club house, the renovated sports hall, the bank accounts; on the other hand, you inherit the association's debts, which for some of you also represent demands on the association.

What you will pay in the future depends on how much you earn (because the club fee is based on this) and what the club owes you (i.e. whether you have claims on the club). That goes for all other young people too. So in the future, club members will pay to other club members. The money stays with the younger generation, so they are not burdened as a whole.

Now Franz is also satisfied. Because he can look forward to a better sports hall, gets pocket money again and can continue to attend tutoring classes. This enables him to complete school better and his chances of making more money later increase. And he suspects who he owes this to: the club, the club management and all club members. So if he has to pay a higher club fee in the future to service the club's debts, that's fine.

The debts only become a problem for the future generation if the modernization of the sports hall fails, the dream of better training fails or the richer club members no longer want to contribute to the club's welfare in the future. In this case, those who are supposed to service and repay the debts with membership fees and those who hold claims against the association suffer from it.

That ends our example. And as with every example, the question arises of how far it will carry. Perhaps the perspective of the younger generation under Federal Chancellors Schmidt and Kohl will help. Their governments did not borrow as much in any year as the federal government did in 2020. But at that time the new indebtedness was over three percent of GDP for several years, and the warnings were correspondingly large as to how much we, the authors of this article, would be burdened in the future would.

We did not notice these pressures. The modernization of the country worked, the training conditions were good and crises were the exception. And yes, we paid taxes so the federal government could pay interest and settle debts. But since these funds were in turn paid out to our generation, they did not suffer from the debt at the time.

Holger Sandte is a lecturer at DIS Copenhagen. Adalbert Winkler is Professor of International and Development Finance at the Frankfurt School of Finance & Management.