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Government Debt: Who Owes Who?

We are often reminded of many countries’ immense and ever growing levels of debt.  But this of course begs the question…who are we in debt to? And what exactly does that indebtedness entail?

The following graph should serve to illustrate one good example of a country with a lot of debt, the United States:

us governement debt

*Note: The graph includes debt owed to the Social Security trust fund and other federal funds. Source: NPR

As evidenced, we can see that the US is mostly in debt to, for lack of a better word, itself.  Most of the US Treasury bond owners (notes that evidence the US Government’s indebtedness to the holder of the notes) are held by specific branches of the US Government itself, US corporations, and US individuals.

The rest of the debt is held overseas by other countries, most of which are the United States’ main trading partners.  Quick research into the debts of Japanese and Chinese government, for example, would reveal that those countries are then also heavily indebted in a similar fashion: mostly to themselves with then portions of their debt held overseas by countries like the US.

If everyone is in debt to everyone, can’t we just wave a magic wand and forget everyone’s debt?  While that may sound like a great idea to a group of people brainstorming, it is unfortunately not a solution in the real word.  Too much of the world’s economies are held together by this mutual indebtedness, not to mention the massive industry and livelihoods based around servicing this debt.  There is also an often forgotten argument in support of the peace-keeping impact of international trade and indebtedness…(for example, a country  is much less likely to antagonize or invade another country who’s markets are employing and/or feeding millions of the first country’s citizens…). Taking on debt is also a useful way for governments, companies, and even individuals to engage in expensive projects that otherwise would not have been possible.

That said, there is most definitely such thing as too much debt.  The US spends Billions of dollars every year just on servicing the interest on the debt.  Japan and other indebted countries share a similar burden.  Should interest rates increase, it will become more costly and difficult to continue issuing new debt, and investors will begin to doubt a government’s ability to make interest payments or return principal.  Of growing discontent is the international attitude towards Japan’s sovereign debt situation.  Already they are beginning to have trouble finding buyers of their JGBs (Japan Government Bonds), and there are whispers of a possible Japan credit crunch on the horizon, which we will discuss in more detail in a later article.

[sources]

– Everyone the Government owes money to – National Public Radio  – October 2013
– 2014 Fiscal Year Budget – Japan Ministry of Finance
– IMF Country Report No. 13/253 Japan – International Monetary Fund – August 2013

 

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