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A Nation in the Red: The Government Debt Crisis and What We Can Do About It by Murray Holland

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CHAPTER 3

THE DEBT TRAP

“How did you go bankrupt?”“Two ways. Gradually, then suddenly.”

—Ernest Hemingway, The Sun Also Rises

The Debt Trap is the trap a country gets into with a weak economy and deficit borrowing that in the view of the market exceeds its capacity to service the debt. A country enters the Debt Trap early on when its government starts borrowing even during good economic times and years before it has borrowed too much debt. The trap is set when the market demands higher interest rates on debt issued by the country. This is the first jaw in the trap. The trap closes when a government is forced by the market to reduce borrowings or face quickly escalating interest rates. Soon after a dramatic rise in interest rates of a country’s ...

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