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It seems most governments (certainly the US, Europe, Australia) have racked up a national debt - but who are the lenders that these governments are indebted to?

Where does the government get the money they spend after they've spent all the taxes they collected? Does it just magically appear because the government prints another billion dollars?

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Who owns the debt?

People and organizations who want to own what has historically been a rather stable investment for most countries. This also differs somewhat from country to country.

In Japan, the second largest owners of debt are citizens in the form of postal savings. The largest is the central bank.

In the United States, debt owed to the public (as per the balance):

  • Foreign - $6.281 trillion
  • Federal Reserve - $2.463 trillion
  • Mutual funds - $1.379 trillion
  • State and local government, including their pension funds - $874 billion
  • Private pension funds - $544 billion
  • Banks - $570 billion
  • Insurance companies - $304 billion
  • U.S. savings bonds - $169 billion

Foreign debt may be owed to countries. For example, China and Japan own large stakes so as to be able to keep their currencies lower than they otherwise would be. In some cases, it may also represent money held by foreign agents, rich individuals or countries.

Another significant holding is intragovernmental savings. For example, Social Security owns about $2 trillion of US government debt.

Money after taxes

Where does the government get the money they spend after they've spent all the taxes they collected? Does it just magically appear because the government prints another billion dollars?

It could, but it usually doesn't. A typical government obtains money beyond taxes by selling government debt. It creates a bond and sells it. The buyer could be the central bank, an individual, an organization, or even another government. If no one wants to buy, then it has to change the price until someone does.

A bond is basically a promise to pay an amount of money at some future time. The cheaper the current price, the better the return (called the yield). So the government might sell a bond for $95 with the intent of paying $100 a year from now.

Most countries manage their money supply through a central bank. The central bank is usually tasked at expanding the money supply at a rate that keeps inflation low without starving transactions due to a lack of money to process them. If they miss on the low end, this creates what is called deflation. Along with a fall in prices, production falls as there simply isn't enough money to go around. If they miss on the high end, they get inflation. High enough inflation also causes production to fall. Falls in production are associated with job loss and increasing unemployment.

Because central banks are usually independent and arcane, they aren't as driven by political needs as governments. Most people don't know what they would want the central bank to do, so there is less pressure on them to take short term actions.

  • Good answer. Worth adding that governments bonds usually form part of an investment strategy. When times are good people invest in stocks, but as the tide turns they switch to government bonds, as though the return is lower the risk is much lower than a declining stock market. So government debt plays an important part in the capitalist system. – inappropriateCode Jun 23 '17 at 6:51
  • @inappropriateCode: That doesn't make sense on a macro scale. If everyone switches from stocks to bonds, then who buys those stocks and who sells the bonds? – MSalters Jun 23 '17 at 11:10
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    @MSalters I don't suppose everyone is going to, but the portfolios of most investors are going to adapt as mentioned. Point being government bonds are an important part of a broader investment system and thus capitalism, perhaps I implied the change to be more absolute than intended. – inappropriateCode Jun 23 '17 at 11:51
  • The intra-governmental holdings are larger than you suggest. As of March the total intra-governmental holdings were a little over $5.5 trillion, with Social Security accounting for about $2.8 trillion of that. See, for example, reports available at fiscal.treasury.gov/fsreports/rpt/treasBulletin/current.htm – Nobody Jun 23 '17 at 11:56
  • That isn't what a bond is usually called, that is a "zero-coupon bond"? A bond is (A) a promise to repay it at the end of its term, and (B) an agreement to pay regular interest payments to the holder of the bond. A "zero-coupon bond" is the (A) part, and the process of taking a regular bond and splitting off the "zero-coupon bond" is called "coupon stripping" or making a "strip bond" out of a bond. – Yakk Jun 23 '17 at 17:57
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Brythan's answer is correct, I will just add explanation on why foreign countries own the debt.

Basically when Chinese company is selling something to USA, they get dollars back. Of course dollars are pretty useless in China. I don't think you could go to a regular shop and pay in dollars. What Chinese people use are yuans. The company asks the central bank, to exchange dollars for yuans. The bank basically emits the yuans and keeps the dollars. Later some other company may want to buy dollars in order to buy something abroad, so the situation will reverse. The national bank earn some money during the process, because of the difference between the sell and the buy price.

In the end the central bank of china has a lot of dollars and they decide to invest them in safe way by buying american bonds.

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    I think that you're referring to the central bank of China that is the "People's Bank of China", not the "Bank of China". Both are different and unrelated - the PBC's the central bank while the BoC's a normal bank. – Panda Jun 23 '17 at 10:35
  • Good point, national bank is not correct term. I mean the central bank of china, whatever it is called. Thank you. – user14816 Jun 23 '17 at 10:38
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    The bigger problem is that most foreign exchange transactions are not done by central banks, but by normal banks. And central banks certainly won't trade foreign currencies in direct transactions with companies. – MSalters Jun 23 '17 at 11:13
  • I agree, I just showed the basic mechanism. – user14816 Jun 23 '17 at 11:36
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There are a number of measures of what might loosely be called national debt.

The most straightforward is the total the a recognised government has formally borrowed. Governments can take out loans just like any organisation from banks or other sources, here they will simply borrow the cash and repay with interest.

Governments can also issue bonds, these are essentially certificates of debt which are sold on the open market and repaid at their face value (usually greater than their original sale value) after some fixed period of time and can also yield interest to the holder. They can usually be traded between individuals untill they mature.

Governments may also operate various savings schemes.

Governments may also engage in various schemes with private companies to finance capital projects which may be a bit less transparent than straightforward loans. For example a private company may agree to cover the capital cost of a road, hospital etc and then lease it back to the state. One example is the notorious PFI scheme in the UK in the early 2000's which enabled the government of the time to embark on a lot of building projects without having to stump up the capital up front but ended up in many cases being terrible value for money in the long run. These occupy a bit of a grey area between an ongoing financial commitment and actual debt as such.

Governments may also have stakes in certain types of large projects especially defence, infrastructure, power generation and natural resources. which may involve guaranteeing loans, regulating prices or specific tax breaks which may constitute a potential financial liability without actually being a debt as such.

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