3.3. State Loans
As taxes are not sufficient to replace missing buying power, states are often resorting to loans, which are then used as source for transfers.
Together with taxes they are used to replace full missing buying power and the system looks balanced. But it is only temporary fix, because even the state will have to repay is debts one day and than there will be the same boomerang effect as with individual loans to ordinary people. Difference is that loans taken by the state are not preceived so critically by people as their own personal loans. They don´t have to make monthly installments towards it – at least this is what majority of people thinks. In reality they do, and they do it in the forms of increased taxes or lack of public services which are being cut in effort to repay the state debt. But because the states are rarely repaying principal and interest, for politicians it is very tempting path. When the debt is maturing, it is revolved with new debt. In reality, the states would have enormous problems repaying existing debts without somebody lending them again. This is clearly visible at current situation in Europe. Despite the fact,majority of states are still accumulating more and more debt.
Where are the resources financing the state coming from ?
It is easy,companies that made a profit and don´t know what to do with it are eager to provide it to the state.
In essence it is the same as if state collected 100% taxes. Difference is that this is voluntary, even that voluntary nature is bit fictitious. If the companies would decide not to buy state debt, their profits would stay at the banks and they would invest them the same way. If nor companies neither banks would be willing to finance the state, they would very soon discover that it is going to have serious consequences. The difference can be seen in Greece, Spain whose citizens are no longer willing to finance the state debt compared with Japan, where there is still this will and trust.(despite higher debt to GDP ratio)