The UK’s debt is apparently now over 2 trillion, but it’s not clear where this money comes from or if they ever actually pay it back.
Is the debt real/repayable? Could we just write it off?
In: Economics
It’s own citizens.
You can buy government bonds. This is you loaning money to the government.
Debts by definition are real (why count them as debt otherwise) and repayable (or else they would be called gifts, donations or, in the case of governments, taxes). Debts can go “bad” ie when lenders start to believe they won’t get paid back or if the borrower stops paying them back.
In theory, governments can simply stop paying. Practically speaking, they won’t unless it is completely a last resort. Writing it off would mean that the currency value drops by a lot. Not only the government but private citizens wouldn’t be able to trade internationally, inflation would skyrocket, domestic production would be hurt.
Goods like food and basic produce go into shortage, welfare stops, pensions are worthless etc. This commonly leads to the downfall of the government or, in worst case, lots of conflict and death.
Debt always has to be repaid. It is a matter of which economic sector pays for it.
Writing it off transfers the losses to the parties who lent to the government.
Printing the money is paying for it through inflation, which means that the consumers and savers pay for it.
Or…you could go to war to seize another country’s assets
The UK Government issues it’s own money.
This money is structured like an IOU.
The “debt” is more accurately called a deficit – it’s the difference between the amount of money the Government has issued into the economy and how much it has taxed back.
Since they are the ones issuing the money, any debt incurred can be honoured, in full, at any time.
The money supply in the UK, USA and Australia is much like frequent-flyer points, store credits, scrip or IOU vouchers.
Let’s have a little look at that …
If I were to produce my own IOU voucher (or a scrip) – yakkbux (YB$) – and I spent 50 of them but gathered none back, I would be in deficit for YB$50 if I then ‘taxed’ 10 of them, without spending more, I’d be in deficit for YB$40.
If I authorised my wife to issue loans denominated in yakkbux, people (compaines, industry, whoever) using them could then take out loans (against their future earning potential). If I then decided to increase the taxation of yakkbux so that now I will spend out less than I tax every year, I will start to run a ‘surplus’ of yakkbux. This will require the people, businesses and domestic industry using them to take loans to create enough yakkbux to pay those taxes.
Or I would have to be able to do enough foreign trade to collect yakkbux from the excise, tariffs and other taxes levied from that sector.
You might realise that, since I create yakkbux out of thin air, I never diminish my capacity to generate them if I’m in deficit nor do I actually end up with more of them when I have a surplus. The private sector isn’t able to produce their own yakkbux (they can create some supply using loans, etc) so can be in “real” debt. The same can be said of the foreign sector – they can’t make yakkbux either – they may not even have the authority to create loans, either, and must trade to get them. I, the sovereign issuer of yakkbux, am the only entity immune from the accounting of yakkbux; I can generate them via spending (and bonds, etc) at any time and I can destroy them when I tax them.
The deficit, the debt, is no more than the difference between how much of the made-up thing I create and spend vs the amount of the made-up thing I destroy via tax.
Writing off the “debt” doesn’t make sense – the size of the number isn’t particularly important in isolation; why write off a simple accounting identity?
There are a lot of confounding issues, of course but inflation is not driven by the “big scary debt number” or a ratio of GDP to spending. Rather, it’s when aggregate spending outstrips the production that inflation can occur; spending alone can’t cause inflation but it must be done in such a way as to prevent inflation – bulk spend on welfare, infrastructure and the like (which are known to bolster economic activity) and reduce spending on the rich, big business, etc (which are known to slow monetary trajectory by hoarding and offshoring monetary assets and avoid taxation).
People, mainly.
Take the US, for example. The vast majority of its debt is in the form of Treasury Bonds. Anyone can go to the Treasury and purchase these bonds and, 20 years later, cash them in. The majority of the US debt is in this form.
The return on investment is incredibly low, but it’s practically guaranteed that you’ll make a profit.
They borrow money by selling bonds. Anyone can buy them. The bond might cost something like £100 and it will do something like pay the buyer £1 a year for 20 years and then pay back the £100. This is the same as borrowing £100 and paying 1% interest for 20 years and then paying it back.
You can also buy bonds second-hand from people who bought them from the government. That’s what people mean when they talk about the ‘bond market’ (which also includes bonds sold by businesses).
> Where do governments borrow money from?
Anyone who wants to buy bonds, including their own citizens, businesses, foreign citizens and foreign governments.
> if they ever actually pay it back.
Yep, each year they pay back whichever payments the bonds specify. They will also issue new bonds, so the level of debt might increase or decrease depending on if they’re paying out faster than they’re borrowing more.
> Is the debt real/repayable?
Yes.
> Could we just write it off?
Yes, but it would make people not trust us so we wouldn’t be able to borrow again in the future. Also it would make other countries angry and they might sanction us in some way. Also it would be bad for UK citizens who had saved using bonds, so it would be a bad move politically to harm them.
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