I've been thinking a lot, and doing some digging, on national debt and how it is serviced. At first glance it seems that the 'debt' countries, eg USA, UK, Japan have unfathomably high debt to GDP ratios. I mean, if if an individual in Japan earned 3M yen p.a. with no pay rise in sight, was responsible for looking after his ageing parents and was 7M yen in debt, would you lend him money? And if so, would you be kind enough to do it at one of the lowest rates available?Now, when I look back in history I see that this is not the first time that debt, as a ratio of GDP, has been so high for these countries. In fact, taking the USA for example, there have been several times in the past century where debt has been approximately as high (excluding pension obligations etc), particularly following World Wars, and it has always been reduced to a maintainable level eventually.More mysteriously, it seems that this has not been paid off by running surpluses. So, the question is how has this been done? No doubt public assets can be sold off to pay down debt. As an economy picks up, tax revenues pick up and reduces the burden. Also inflation can reduce the value of debt. Default/restructuring will reduce the debt, though this doesn't seem to have happened too often in the history of USA, UK and Japan. Finally printing money can redistribute wealth and perhaps even inflate away debt. So, have I missed anything? How do you think debt will be reduced this time round? I'm curious to see how people think this could play out.If time marches on and the these debt of these countries becomes 10 or even 100 times larger, how would things be different? If interest rates were 2 or even 5 times higher, how would things be different?

You've covered the primary means of debt reduction. It's true that a country can both run a deficit and reduce it's debt -- if the rate of debt retirement exceeds the rate of new debt formation.Whether a lender is willing to give money to a high-debt country depends less on the long-term chance of default and more on the chance of default over the duration of the loan. And if a debtor nation enjoys low rates, that's probably enough evidence of stability that most lenders will follow the herd. There's also regulatory issues at work -- a high-debt country can mandate that it's banks hold the country's debt.I'm not sure if today's situation can be compared to historical examples of debt reduction due to the new phenomenon of growing pension obligations and stagnant demographics.

Shouldn't one think first about whether it is desireable or even necessary to do so? The toughest part of problem solving is typically deciding what the problem is. Or have you got that part figured out? T4A has addressed that bit, pointing out that it really boils down to whether or not lenders will still lend to you.Given that debt reduction has been identified as a necessary policy, one would normally think that a balanced approach would be called for, namely a combination of spending cuts and tax increases. In today's one-percenter dominated world a balanced approach is painted as abject class warfare, you need look no further than America to see this. The Republican Party there has painted itself into a corner by refusing to discuss any tax increases, so half the fiscal palatte is missing. I strongly recommend you do not waste any time studying the USA for answers, unless you are also interested in studying dysfunctional government and how seeming morons have taken control of a political party. Fun in itself but not very informative. An interesting counterexample to the prevailing political orthodoxy that the have-nots must bear all the bad news is France. While the EU preaches austerity (and is not exactly getting great results with it), France has reversed course and decided instead to raise taxes on wealthy people and companies (shudders of horror!) to help control debt growth. Paul Krugman has weighed in on this and has concluded that the flack France is taking for adopting a balanced approach is coming from people with an agenda to dismantle the welfare state. Disenfranchisement under the cover of fiscal responsibility.There, that should get the knuckledraggers' tongues wagging.

DavidJN asks a very good question: should governments ALWAYS reduce debt? My gut reaction was "yes" but now I realize that it's not quite true. If governments can be a lender of last resort, they are also a special class of best-borrower that creates near-risk-free time deposits on behalf of citizens and financial institutions. That seems like a useful service although it seems unlikely that the optimal level of risk-free instruments needs to be as high as the levels of debt in the US, EU, Japan, etc. Otherwise perpetual debt must be seen as a perpetual wealth transfer from tax payers to risk-averse savers. That seems like something that isn't good for the tax payer or for the capital utilization of the society.The fair balance of spending cuts vs. tax increases is not at all clear. If governments incurred debts through Keynesian stimulus, then debt reduction should imply a tapering of that stimulus (which might involve only spending cuts if the stimulus was solely via spending boosts). But the larger issue is that "cut spending" vs. "boosting taxes" is an utterly wrong dichotomy. Not all spending is created equal in terms of it's ability to sustain or promote future economic growth that repays debts. Spending on education, R&D, and infrastructure probably creates more long-term growth than spending on retiree's pensions. The analogous is true for taxes. For example, a direct tax on assets would encourage asset holders to seek returns on assets whereas a progressive tax on returns discourages asset holders from seeking returns if those returns involve risk. Both taxes might raise the same level of revenue but one encourages investment for growth and the other discourages investment for growth. Whether France's approach works or craters the economy will depend on the mobility of the wealthy -- can they simply take their rich toys elsewhere -- and the effect of emigration of the wealthy on the long-term economy (e.g., investment in France and consumption in France which are both activities of the wealthy).One nasty long-term trend seems to be the rise in volatility due to accelerating innovation, global distribution, and the rise of a real-time economy that's more prone to fads. The core problem with progressive taxation is that it turns risk assets into covered calls -- limiting the gains without a symmetric modulation of the losses. The net effect is to diminish the expected profits from risk taking during times of increasing volatility. If one thinks the world economy is getting more volatile, then penalizing risky investments will be counterproductive.

Thank you all for your input I agree and find two parts of what Traden4Alpha has said particularly thought provoking." . . . if a debtor nation enjoys low rates, that's probably enough evidence of stability that most lenders will follow the herd. . . "I agree, however this reminds me a little of the dotcom boom. Intrinsic value became meaningless. Instead the market said, 'if this tech stock's price has been enjoying such gains and enthusiasm, that's probably enough evidence that it has value and most buyers will indefinitely continue to follow the trend'. That ended in tears.A similar argument could be made with packaging subprime mortgages and traunching. People were buying debt as CDOs etc saying that, 'These 'investments' are rated highly and other people are buying them, so they must have value'. Once again when intrinsic value is ignored, it seems to end badly." . . . There's also regulatory issues at work -- a high-debt country can mandate that it's banks hold the country's debt . . . "I agree with this observation and also find it interesting. So, if a government mandates that it's banks hold its debt then it is faced with an interesting challenge. It can't default without bringing down it's financial system. However, it can't borrow above the economy's ability to service that debt indefinitely. It's a time bomb. So, if default is not possible then what? Perhaps they see the only way to delay the inevitable beyond a governments term of office is by artificially lowering interest rates and printing money in some form

Reduce the workforce, while holding production constant by increasing efficiency. Print $100 for every unemployed man woman and child to continue consuming, and $1 million for every banker. The debt never has to get paid down, unless the lenders decide to shrink their holdings. Then it gets paid down automatically.