https://www.cnn.com/2024/07/02/economy/global-debt-crisis/index.html
In: Economics
Have you heard of bonds?
When a person invests in bonds, what they’re really doing is loaning money to the bond issuer. In the USA, the federal government bonds are called Treasury Bonds, you may have heard of them. States, cities, and private companies issue bonds to borrow money, too.
Ultimately, we owe money to people who invest in debt. Those people earn interest and even sometimes a capital gain on bonds. I personally have shares in a mutual fund that invests in bonds. So “we” owe money to business and investors, including myself.
The future, the future kids from all the countries that issue bonds. What a shit show, really. But that’s how you create most of the money in suppy. Debt.
tldr: everyone
Most government debt is in the form of bonds which are short term fixed loans.
The biggest holders of bonds are actually average people.
If you have any savings in a pension or mutual fund there’s a good chance you own bonds and therefore a small part of government debt.
Foreign countries and companies will also buy bonds because it’s a safe investment and good way to hold onto reserves of foreign currency.
Government debt therefore is the backbone of the savings and loans industry.
Sure, people can owe to each other, and the government can owe to its people or other governments, but I like to think of it this way:
Suppose you’re the only person on a desert island, and you survive on a steady supply of coconuts from the one coconut tree. When you arrived there, there’s already a pile of 100 coconuts laying on the ground.
Say, your body survives on one coconut a day on average, but once in a while you have to eat two or three because you ran around the island, and on other days you don’t have to eat at all. On the over-consumption days, you’re essentially owing coconuts to your future self. Someday, you’ll have to eat no coconuts to replenish that pile of coconuts.
Our economy works like this: by eating more coconuts today, we believe we can work harder to plant and raise a second coconuts tree, which will produce several more coconuts a day. By then, we can pay our past debt to ourselves and more than cover our daily coconuts needs. So you start eating more coconuts from the pile of 100.
When the pile goes down to about 20, you’ve worked enough that the second tree has matured, and you’re in good shape. Perhaps now you’ll eat even more coconuts a day to raise a third tree? But there’s always a risk. What if the second coconut tree doesn’t grow up like you thought? What if the first tree gets blown over one day?
Our world is always living beyond its means, investing in a future that is more prosperous and productive than today. That’s the 91 trillion we owe to our future selves. World leaders have to reckon with the question: are we really able to raise that second coconut tree to replenish the pile we’re eating from today? One day, we’ll run out of space on this little desert island to raise trees, and that old pile will run out. How do we prepare for such a future?
It’ll make more sense once you understand there is a very thin like between debt and money, and sometimes its not there at all.
Say you have a dollar and deposit it at a bank. You have 1 dollar in assets, bank has one dollar in liabilities and one dollar in cash.
Alice borrows a dollar from that bank. You have dollar in assets, bank has dollar in assets, dollar in liabilities, Alice has a dollar in cash and a dollar in liabilities. Thats already 3 entities, each with dollar in cash or assets, never mind the two dollars in debt. Even though its the same singular physical dollar changing hands.
We owe it to the future.
Worldbank says the global GDP (our labor value) is a little over $100T.
So, if we owe about $100T and produce about $100T per year, we owe ourselves about a year’s worth of production.
*Governments* are 91 trillion in debt, not the whole world (see the first line of the article you linked to). The whole world can’t have a net debt – we’re not borrowing from other planets. At most, there could be debts that cancel out. For instance, if I borrow $10 from you and you borrow $10 from me, then by some accounts there is a total debt of $20. And that may be a fair/useful assessment if you and set terms about interest payments and such, which mean that the two debts don’t automatically cancel out between us. But of course, in terms of the actual balance of debts, that comes out to $0.
Governments owe this money to businesses (including banks and investment funds) and private individuals that they have borrowed it from. These parties were willing to lend this money, because they’ll get interest on it. And by and large, governments are very reliable entities to lend money to, nearly always paying back what they owe. This is also good to bear in mind when you hear the latest news story about how national debt is higher than it has ever been. It can feel as though the government is only borrowing more and more money, never paying it back. But the reality is the opposite: their creditors get paid, in full, and on time. The reason the debt grows isn’t because the existing debt isn’t getting paid off, but because the government takes on new debt.
And that debt is a good thing, by the way, as long as the investments the government makes with its borrowed money pay off. For instance, if you invest in a new subway network that reduces pollution and increases mobility, the resulting reduction in healthcare costs, increase in economic productivity (and therefore increased tax revenue) and income from people using the subway (among other benefits), may mean that the return on that investment is more than what the loan ends up costing (in terms of the principal + interest). Borrowing money and investing it this way is a means to accelerate development and growth.
Left hands owe right hands. Peters owe Pauls.
People take wages and drop them in banks or want to save for the longer term or invest for better returns.
Banks take smaller short term deposits, bundle them and make longer term loans to people so they can borrow to buy cars or houses, etc. Or, the banks lend to people’s businesses, so businesses can expand, or build factories and such.
Those businesses that took the bank loans, the banks bundled or “bond”ed these loans, and sold them to people as saving bonds, paying savers higher interest than they offered on shorter term deposits.
Sometimes the businesses offered to share their ownership… to the public, selling stock equity ownership, created a stock market.
Tldr. All the world’s debt is the circle of life of money – those who have it, lend it to those who don’t
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