Who borrows the money (be it private or public) doesn't matter; what matters is how the borrowed money is spent.
If borrowed money is invested in projects that don't produce real productivity gains it will lead to reductions in living standards over time (ie ongoing income from the investment needs to be greater than the interest burden).
So if a government borrows money and spends it on things that are non-productivity enhancing over time (ie usually things like welfare payments, bureaucratic jobs or even excessive levels of health care) then living standards will decrease as they raise taxes to pay back those debts (unless the private sector can produce productivity gains that more than offset the government sector's malinvestments).
The same applies if governments over taxes their citizens and then spends that tax revenue on investments or consumption that are less productivity enhancing than what the private citizen would have achieved with the same capital.
Of course if the government borrows money and invests it well into something that enhances productivity (ie maybe some infrastructure that benefits large parts of the economy) then that will improve living standards over time.
The same rule applies for private individuals or corporates; any investment made with borrowed money needs to sustainably increase their income producing capacity more than the cost of the interest or their living standards will deteriorate over time.
Usually (but not always) the private sector (particularly corporates) allocate capital better than government, probably because the private individual/corporate carries the full consequence of poorly allocated capital (ie they lose personally) and as a result have greater incentive to allocate it as effectively as possible.
Democratic governments on the other hand have a monopoly over tax collection (ie there is no real competitor to put them out of business or incentives for them to run a lean operation) and those that allocate money for the government are not personally liable for any failed investments of government (the tax payer is) so there is lower incentive to allocate capital effectively.
Though at present it's Australian households that are carrying most of the Australian private debt, which is mostly tied up in the form of housing loans (most of that being owner occupier).
So how does that stack up as an investment...
Well a house "produces shelter", which can be sold (ie for a rental income), but if you live in that house (like most Australians do) then that "shelter" is not sold rather it is "consumed"...
And borrowing to consume is always dangerous and can only be funded by your future income earning capacity (ie at some point in the future your must abstain from consumption for the amount borrowed plus the amount of interest paid).
So the way our monetary system works "debt is money", and "all debts must be paid", it's just a matter of who pays...
So when any entity, private or public, borrows money, if it is invested poorly and the debt can't be paid someone else will pay for that loss...
So when most of a nation uses debt to fund consumption it has the potential to create consequences for the whole system if the servicing capacity diminishes from the interest burden or a fall in income...
By that I mean, when a borrower makes a bad investment the borrower must pay for the loss on that investment out of their own equity, if the borrower can't pay for the loss out of their equity (ie they are bankrupt) then the loss is passed onto to the bank which pays for it out of its equity, if the bank can't pay for the loss out of its equity (because its bankrupt) then bank will need to be nationalised (bought out) by the government who will then pay for it out of its ability to raise equity via taxation, if the government can't cover the losses the central bank will need to step in and monetise the debt and then the loss will be passed onto society in the form a debased currency (inflation) which ultimately results in lower currency (lower purchasing power and living standards relative to the worlds) and higher interest rates because of the increased risk of lending to untrustworthy borrowers.
This is why people buy gold when they see high levels of debt within a society (especially if they believe that that debt has been allocated to non-productive investments). Gold can't be debased or defaulted on. Which is also why central banks keep it as foreign reserves.
Over the last couple of decades (due to government incentives and increasing personal incomes from a mining boom) the Australian private sector created a self-reinforcing housing bubble.
It achieved this by continuing to increase its debt levels to buy property, which increases the money supply and boost nominal GDP which pumps up the "nominal prices" (like house prices and their wages) and assume they think they are becoming wealthier, but they are not in real terms once the debt is backed out of the system.
Higher property prices themselves are not a problem, but when the majority of purchases are made using debt then sustaining those prices is dependent on continued debt serviceability (ie personal income) and the continued access to credit.
This is becoming the issue in Australia with mining boom now over many incomes have dropped markedly for the first time in decades (we've also not had a recession for 25 years) and with a construction sector beginning to slow and the dollar volume of property transactions recently dropping the most since the GFC the financial, insurance and real estate sectors will soon go through their own revenue tightening phase (which will also hurt incomes).
Perth property is a good example of what is likely to happen across the country in time.
Nonetheless these debt fueled bubbles can grow for quite some time because on the way up most people regularly get their properties revalued to be able to tap into the "equity" to be able to borrow more to buy more property (which further increase money supply and further increases nominal incomes and debt serviceability) or increase their level of consumption (which increases GDP and personal incomes).
The problem with taking this approach to wealth and lending is that it assumes that 100% of the housing stock can be revalued at the prices that 5% of housing stock is being purchased for mostly with credit.
Yet if everyone with property debt in Australia decided they wanted to sell to pay off their loans property prices would need to plunge to the point where the free cash flow on a property investment is at least comparable to the return on equity being achieved in other asset classes (like stocks) for people to switch asset classes...
Often when asset prices are not funded from the free cash flows and savings from the original investments (ie self funding) people eventually lose touch with what the market price would be if the asset could only be purchased with equity (the mania phase).
So how this is likely to play out is, eventually those lending the money see increasing risks and reduce/stop lending or increase interest rates to compensate for the added risk (started last year). This has the double effect of reduce demand for property because buyers can't fund the purchase without access to credit and those that have borrowed to invested in an assets whose income doesn't cover the interest burden (ie are making a loss) become incentivised to sell...
More sellers means prices get pushed down, falling prices incentivisise others who purchased because prices were going up to sell and with each loan that is repaid the economy's money supply contracts, which also reduces nominal GDP/incomes (especially if the velocity of money also slows).
Reductions in nominal GDP leads to lower personal incomes (or more commonly higher unemployment), which means lower abilities to service debt and more forced sellers...
Debt collapses (left unabated) force the "speculative" money out of the system and push prices back to producing market returns for equity funded purchases.
In regards to what CB's can do with regards to invent new tools to deal with financial issues, ultimately intervention never works in the long run. Water wants to find its level and capital will flow to where it can get the best return for the lowest risk.
So when the CB's use QE it stops the panic and temporarily removes the "deflation risk", but it creates an "inflation risk" (which they are trying to get) if commercial banks begin to lend again and the velocity of money increased (which hasn't happened).
So now they will try things like negative interest rates, but I don't think that will work either because it won't change the debts levels and will likely just further inflate asset prices. I suspect in the end they will opt for helicopter money because 5 years on from the GFC confidence has not been restored because the debts that existed prior to the GFC still exist today - they've just move from private citizen's, corporate's and commercial bank's balance sheets to government and central bank balance sheet...
And as I've said, in the long run "all debts must be paid" and most people are going to get out there and spend and make new investments until their old obligations are no longer a burden.
That said, if CBs of the world want to offer me negative interest rates, I'm very happy to let them pay me interest to buy gold mining stocks that have free cash flow yields of 10%+ and a business engaged in the selling an asset whose core purpose is to protect against default and currency debasement...
Gold mining stock prices will CB's final freekick to the world.
