If all countries increase their debt in difficult economic times, they can’t be borrowing from each other, so who do they borrow from?

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If all countries increase their debt in difficult economic times, they can’t be borrowing from each other, so who do they borrow from?

In: Economics

Citizens. Most sovereign debt is owed to the country’s population, banks and businesses anyway.

Countries sell bonds as investments. These bonds have a fixed time period before they’re paid out. They get invested in by many different groups, including some foreign governments. For instance, the Social Security program in the US holds ~$5 Trillion dollars in bonds.

Unlike other forms of debt, these bonds are fixed term. They cannot be cashed in against the government until they have fully matured. Even though Japan holds a few trillion dollars in debt, they can’t just turn around and cash it in when they want. They typically take ~20 to ~30 years, depending on the term of the bond.

A country doesn’t really “borrow.” It sells debt instruments.

The US Treasury issues debt instruments called bonds. A bond is a promise by the government to repay the cost of the bond, plus interest, at a later date (10, 20, or 30 years). People buy these bonds because they are an incredibly safe investment. The US government always honors its bonds.

The biggest single holder of US bonds is the US Social Security Administration, and the majority of bonds are owned by US citizens and US companies. International companies and foreign governments also invest in US bonds, because they are such stable investments.

So a country’s debt isn’t really like personal debt at all.

Countries don’t borrow from each other — they borrow from investors. Some may be bought by foreign governments, but in general its pension funds, insurance companies, mutual funds, university endowments and such who are buying the debt that governments sell.