Hi! I was looking up the statistics about the national debt of my country and the negative implications thereof. I assumed it must be owed to other countries. Pertinently, every major economy I came across has a very high national debt, including the developed countries. Who is this national debt owed to? If it’s owed to each other, why is that a major problem? If it’s owed to the citizens of it’s own country, why is that a major problem?
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It’s not typically owed to a single party but rather divided up amongst dozens of groups, other governments and even citizens. It’s also not necessarily true that a high national debt is bad in the same way as a high personal debt. It’s, also, also worth noting that above a certain amount of money loans and debt don’t usually work the way it does with small, people-sized amounts since there are liquidity issues and problems with definitions of repayment.
Most countries owe the money to their citizens or corporations owned by their citizens. In some cases, the loans are mandatory, usually presented as a retirement fund or pension scheme.
Otherwise, they sell things called treasury bonds, which anyone can buy. Though they often only allow a portion to be sold to people in other countries.
Countries also provide loans. Some countries lend more than they borrow. Rather than having to spend money servicing debt they get paid money. For example, Singapore is a net creditor, and in the publicly reported budget incoming money from interest is in the list along side income taxes and such as where the government gets its money.
These loans may be something like a negotiated thing between the leaders, or it might be them just buying treasury bonds like everyone else.
Finally, there are stuff like the International Monetary Fund. That’s an international organization to act like a big bank countries can borrow money. Countries become members and pay what amounts to be a subscription, and the IMF also makes money on the loans it gives out like a bank.
Itself. Local banks
In addition to other answers here, countries often owe money to themselves. They “borrow” (print) money in order to pay for new systems such as health care, but also raise a tax in another way to “pay” for it.
Well in most cases, life is unpredictable and the money they estimated they’d receive in taxes turns out to be less than they expected or the system they implemented costs more than they thought. Since ignoring the difference would lead to a lack of faith in their currency from investors, the country writes it off as a debt that they’re going to pay back. This piles up and you have more debt.
Being in debt for a country is typically a good thing, as that means they are expanding in some way. The problem arises when the debt defaults and the currency drops in value.
International monetary fund..
Governments issue debt in the form of bonds, a promissory note which will pay out more money in the future than the cost to purchase it. It is, for all intents and purposes, a loan, lent by the purchaser of the bond to the government. So, whomever holds the bond is the person to whom the debt is owed.
>If it’s owed to each other, why is that a major problem? If it’s owed to the citizens of it’s own country, why is that a major problem?
Well, it *depends*. What it depends on is is whether the service on the debt will grow at the same rate as the government’s tax receipts. You may notice that the economy tends to fluctuate. We have boom years where everyone is very hopeful, and spends money freely. In those times, incomes are up, and tax receipts are also up. However, for every good year, you’ll get a bad year, when the market starts to get skeptical that all the exuberance is unwarranted, spending shrinks, jobs are lost, and government revenues fall.
So, because most governments have programs which are intended to exert a moderating force against this business cycle of boom and bust, that means when times are good, the government should run surpluses, and when times are bad, they should run deficits. This, however, is where things get problematic, because governments almost *never* want to run surpluses. Instead, they will cut taxes, which winds up heating up the economy, and *exacerbating* the business cycle.
So, when the business cycle turns bad, there are no government reserves to draw upon, and the state must issue *more debt*. So, the question becomes, will there come a point at which the investors who buy government bonds no longer believe that the state has the facility to pay back the money they owe.
I should be clear, it’s not that the money wont necessarily be paid back, it’s that they’ll *print money*, and they pay back their debts with inflated currency that is, in fact, worth less than what you expected. You know, like what’s happening right now.
So long as government debt is issued in your government’s fiat currency, high deficits will result in inflation, as the state prints money to meet their “obligations”, which means that the bondholders will take a bath, along with anyone unfortunate enough to be unable to command a raise when inflation rips through the economy and gives everyone a pay cut.
Some countries, however, have currencies so unreliable and weak that nobody will buy bonds denominated in it. So, they’re obliged to borrow money which must be paid back in a currency they can’t print. Short term this might work, but if revenues can’t be raised, they can swiftly find themselves in economic collapse, as the government can’t pay back their debts, or inflate their currency. Look no further than Lebanon or Sri Lanka for an example of this right now.
Let’s look at the US; as the famous “debt holder” it’s a good example – this is 2013, because i found a good chart for that year.
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34% of the debt is owned by other countries – 13% by china, 7% by japan, and 19% by “other foreign nations” e.g. France, or Britain; this is usually simply the other government buying Debt bonds just like a private citizen would, sometimes there are special arrangements (e.g. reduced tariffs in exchange for a low interest loan.
44% of the debt is held by the government itself thusly:
-16% of the debt is social security funds – this is the money the US owes people who are living on social security, and was “loaned” to them while they were working.
-12% of the debt is federal reserve debt – the government loaned ITSELF money or has bought back its own debt, this does economic magical stuff to stimulate the economy, control inflation, and otherwise make the economy do better.
-13% of the debt is held by other federal government organizations – e.g. the FBI and CIA hold significant portions of the US’s debt.
-3% is held by state and local governments – some states that have a positive budget will buy federal debt to supplement their income.
Our last section is individuals and corporations –
6% are owned by mutual funds (investment groups)
3% are owned by private pension funds
2% are owned by depository institutions (banks and credit unions)
2% are owned by insurance companies
1% are owned by private individuals (yes YOU can buy some US debt!)
and the remaining 8% is held by “individuals, Government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors,”
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as for “why is that a major problem” – it really isn’t. That’s why we aren’t doing anything about it. The loans stimulate the economy very cheaply by making more money available. It can be a problem over the VERY long term if the debt is continually growing (which we are starting to approach) as solvency can become an issue and people may start being concerned about the country’s ability to repay the debt, but as long as investors trust the government to repay them, the debt is really not an issue.
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