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Government debt

From Wikipedia, the free encyclopedia

Government debt (also known as public interest, public debt, national debt and sovereign debt)[1][2] contrasts to the annual government budget deficit, which is a flow variable that equals the difference between government receipts and spending in a single year. The debt is a stock variable, measured at a specific point in time, and it is the accumulation of all prior deficits.

Government debt can be categorized as internal debt (owed to lenders within the country) and external debt (owed to foreign lenders). Another common division of government debt is by duration until repayment is due. Short term debt is generally considered to be for one year or less, and long term debt is for more than ten years. Medium term debt falls between these two boundaries. A broader definition of government debt may consider all government liabilities, including future pension payments and payments for goods and services which the government has contracted but not yet paid.

Governments create debt by issuing government bonds and bills. Less creditworthy countries sometimes borrow directly from a supranational organization (e.g. the World Bank) or international financial institutions.

Monetarily sovereign countries (such as the United States of America, the United Kingdom, Australia and most other countries, in contrast with eurozone countries) that issue debt denominated in their home currency can make payments on the interest or principal of government debt by creating money, although at the risk of higher inflation. In this way their debt is different from that of households, which are restricted by their income. Thus such government bonds are at least as safe as any other bonds denominated in the same currency.

A central government with its own currency can pay for its nominal spending by creating money ex novo,[3] although typical arrangements leave money creation to central banks. In this instance, a government issues securities to the public not to raise funds, but instead to remove excess bank reserves (caused by government spending that is higher than tax receipts) and '...create a shortage of reserves in the market so that the system as a whole must come to the [central] Bank for liquidity.' [4]

YouTube Encyclopedic

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  • ✪ 10 Myths About Government Debt
  • ✪ Understanding the National Debt and Budget Deficit
  • ✪ Deficits & Debts: Crash Course Economics #9
  • ✪ America's Debt Crisis Explained
  • ✪ Who Bears the Burden of Government Debt? | Robert P. Murphy


ANTONY DAVIES: Myths about the government debt. Myth number one, the government owes 20 trillion dollars. How much is 20 trillion dollars? Suppose you go to Germany, and in Germany, you go to every town. In every town, you visit every store. In every store, you look at every shelf and grab everything that is for sale. The amount of money you spend will not be $20 trillion. If you go to Germany and then to France and you go to every town, and within every town, you go to every store. In every store, you look on every shelf and you buy everything. You still will not have spent $20 trillion. You can go to England and while you're there, you can go to the North Countries and buy everything that's for sale, and you still will not have spent $20 trillion. In fact, to spend $20 trillion, you have to go to every country in Europe, visit every town, in every town, go to every store. In every store, look on every shelf and buy everything. And then you will have spent about $20 trillion. But the myth is that this is how much money the government owes. It turns out that there's more, called unfunded obligations. Unfunded obligations is money the Federal Government has promised but which it does not and will not have the money to pay. Largely, this consists of promises of retirement and medical benefits. If you would take the present value of all the future promises of retirement and medical benefits the government has made and subtract from that the amount of money that's in the government's Social Security and Medicare trust funds, and then subtract from that the amount of money the Federal Government anticipates collecting under the current law from future Social Security and Medicare taxes, you will still have an amount of money left over that the government does not have. And that's the unfunded obligations, an amount of money the government has promised, which it does not and will not have the money to pay. Estimates of unfunded obligations vary from the astronomical to the unbelievable. On the low end, people have estimated unfunded obligations to be about $80 trillion, on the high end, $200 trillion. This means that the Federal Government's total financial obligations range somewhere from 100 to $220 trillion. Let's say, roughly speaking, the Federal Government owes about $150 trillion. Myth number two, the government owes $150 trillion. Well, it turns out there's more to it. There are federal agencies that don't appear on the Federal Government's budget. There are government-sponsored enterprises like Fannie Mae and Freddie Mac that don't appear on the government's financial statements, and they owe another $8 trillion. There's then state and local governments that collectively owe about $3 trillion and have another 5 trillion in their own unfunded obligations. When we put it all together, the total US governmental financial obligations total about $165 trillion. Myth number three, government borrowed from the Social Security trust fund isn't really debt because we owe it to ourselves. Well, it turns out there is no ourselves here. The trust fund belongs to current and future retirees. So when people retire and the government does not have the money that it has promised them, one of two things must happen. Either the government must increase taxes on future workers to pay for the Social Security and Medicare obligations it has promised, or the government has to cut the promised Social Security and Medicare benefits that it had promised to retirees. Either way, someone must pay. Myth number four, the government can't go bankrupt. This is technically true because the government promised to pay back a certain number of dollar bills. And so as the government starts to run out of money, it can simply print more, thereby satisfying its obligation. But while that's technically true, it's effectively false because when the government prints money, it erodes the purchasing power of dollars, thereby creating inflation. For example, suppose you have a bunch of people and these people buy things. They buy things from Wal Mart, from Mcdonald's, and Ford. In buying these things, they give these businesses money. In return, they receive goods and services from these businesses. The ratio of the dollars they pay to the goods and services they receive, we call prices. We have the average price of a hamburger, the average price of a pair of shoes, the average price of a car. Now, if the government were to print enough money to double the money supply, we would have twice as many dollar bills floating around but the same amount of goods and services. All that would happen is the prices of these goods and services themselves would double. With twice as many dollar bills, a hamburger now goes from a price of $4 to a price of 8. The car goes from $30,000 to a price of $60,000. One of the prices that will double is people's wages. Interestingly, you're left with the following. Under scenario one, without the government printing money, let's suppose you earn $50,000 a year and the price of a hamburger, shoes, and a car, things you would buy, are $4, $30, and $30,000. And then along comes a government who prints lots of money, and in printing the money, it doubles all the prices, including your income. So now, in scenario two, you're earning twice as much as you were before, $100,000, but the prices of the things you buy have all doubled as well. If I ask you, are you better off in scenario one or scenario two, the answer is you're the same in both. It doesn't matter to you whether you're earning $50,000 and a car costs 30, or whether you're earning $100,000 and a car costs 60. It's the same car. Now, there is a difference in the two scenarios, and the difference shows up when you look at your savings. Let's suppose, in scenario one, you had $10,000 in savings, you're earning $50,000, and a hamburger costs $4. Along comes the government, it prints money. In printing money, all the prices double. That means that the hamburger now costs twice as much, the shoes cost twice as much, you're earning twice as much, but your savings is the same. It's the same $10,000 sitting in savings. What has happened, when the government comes along and prints money, in effect, what it's doing is draining away the purchasing power of your savings. Economists say it this way, "Inflation is a tax on savings." When the government prints money and thereby creates inflation, we get the same exact effect as if the government had imposed a tax on people's savings. The fact is that the government ultimately pays for bankruptcy by taxing the purchasing power of people's savings. Myth number five, the government can solve its financial problems by raising taxes. Well, it turns out the government can't raise taxes at all, it can only raise tax rates. Taxes are what happens when the tax rate that the government impose interacts with people's behavior. This is perhaps the most interesting picture in all of economics. It's interesting precisely because it's so boring. What you're seeing here is federal tax receipts. This is all tax revenue from all sources combined, payroll taxes, income taxes, estate taxes, tariffs, everything, federal taxes, all sources combined, as a fraction of GDP. What you see is, from 1950 up to the present, this has remained relatively stable at about 17%. That is, over time, if you think of the economy as a pie, the government has collected a constant 17% slice of this economic pie. Now, let's superimpose on top of this, for example, the top marginal income tax rate. Back in the 1950s, the top marginal income tax rate was north of 90%. It dropped in the 1960s, reached an all-time low during the Reagan years, goes back up during Bush the first, comes back down, goes back up again. This is the top marginal income tax rate. When you talk about taxing the rich, this is the rate that applies to the rich. But notice what happens here. In years in which we taxed the rich at a very high rate, the government collected 17% of the economy as tax revenue. In years in which we lowered the tax rate on the rich, the government still collected 17% of the economy as tax revenue. The same is true of, for example, the capital gains rate. When capital gains taxes were particularly high, the government collected 17% of the economy as tax revenue. When capital gains taxes were particularly low, the government collected 17% of the economy as tax revenue. The same is true of the average effective corporate tax rate. When corporations paid higher fractions of their profits to the Federal Government, the Federal Government collected 17% of the economy as tax revenue. When tax rates on corporations were lower, the government still collected the same 17% of the economy as tax revenue. It didn't matter whether we taxed the rich or capital gains or corporations. It didn't matter whether we taxed them a high amount or we taxed them a low amount. Regardless of what the government has done, historically, it has consistently collected the same 17% of the economy as tax revenue. Now, you might say, "All right, but we're looking at tax revenue as a fraction of GDP. Tell me what's happening to tax revenue, straight up." Let's look at what happens to tax revenue as tax rates change. What you see here is the top marginal income tax rate. This is data from 1940 to 2015. Across the bottom as we move to the right, we're taxing the rich at a higher rate. As we move to the left, we're taxing the rich at a lower rate. Up and down, we're measuring tax revenue per person, one year later. This is total federal tax revenue on a per capita basis, one year after the tax rate goes into effect, and this is all adjusted for inflation. The story we hear when we hear things like, "Well, we need more tax revenue so we need to tax the rich more," implicit in that statement is as you increase the tax rate on the rich, we will collect more tax revenue. But if we actually look at the data, what we see is a different picture. The actual data looks like this. On average, as we have increased the tax rate on the rich, one year later, the Federal Government has actually collected, on average, less tax revenue. There are exceptions to this but there's also a very clear trend that the tax revenue moves in the opposite direction that we think it should. This is not just true of the top marginal income tax rate. We also see it if we look at the capital gains tax rate. Now, the relationship here is not as tight but it's disturbingly in the same direction. On average, as the government has increased the capital gains tax rate, one year later, it has collected less tax revenue than it did before. We see the same phenomenon with the corporate profits tax. We see the same thing with the estate tax. In fact, of all the federal taxes, I'm only aware of two which, historically, as the government has increased these tax rates, its tax revenue has actually gone up. Those two taxes are Social Security and Medicare. The disturbing part of this is these are the taxes that fall most heavily on the poor and the middle class. Myth number six, the rich aren't paying their fair share. What constitutes a fair share? What you see here is average market income of various income groups in the United States as of 2013. We have the poorest 20% of Americans at the top. Their market income, that is income they earn from participating in market activities as opposed to money the government gives them, their market income is about $15,800 on average. Here's the middle-income Americans, their average income is about $53,000, and the top 1%, just over $1.5 million. Let's ask, what is a fair tax rate for these people to pay? As we talk about tax rates, let's talk about effective tax rates. What I mean by that is after you have done all of your legal and accounting gymnastics and write-offs and deductions and exemptions, when all that's finished, what fraction of your income did you end up paying to the IRS? That's the effective tax rate. We can argue about what constitutes fair. A lot of people tend to answer the following way, the poor should probably pay somewhere around 2%. A lot of people think that the middle-class Americans should pay around 15%. And a lot of people think that the top 1% should pay around 30% of their income as taxes. Now, we could argue about whether these things are indeed fair but these seem to be numbers that lots of people will tend to agree with. Let's look at what these groups actually pay. If we look at the federal taxes collected from each of these groups, we see something like the following. The average household amongst the poorest 20% of Americans pays, on average, $800 in federal taxes. The average middle-income household in the United States pay about $9,000 in taxes. The average household amongst the top 1% pays about half-a-million dollars in federal taxes. Now, this isn't the end of the story because we don't just pay money to the Federal Government, the Federal Government also gives money back. A lot of this comes in the form of the earned income tax credit or Social Security benefits or unemployment compensation, but all of these things are instances in which the government has first collected money and then turned around and given the money back. Let's account for this, and economists call this transfers. Transfers are money the government gives to people. The average household amongst the poorest 20% received an average federal transfer of about $9,600 in 2013. The average middle-income household received about $16,700. The average top 1%-er earned about $800, most of that is likely coming from Social Security retirement benefits. But notice what happens now, if we calculate the effective tax rate by accounting not just for what people pay to the government but for the money the government pays them back, what we find is something astounding. We claimed that a fair tax rate for the poorest Americans is 2%, and a fair tax rate for the top 1% is 30%. If we run these numbers, what we find is the poorest 20%, on average, are actually paying -56%. That is, when all the dust settles, they're actually receiving more money back from the Federal Government than they paid in the first place, making their effective tax rate below zero. This is true all the way up through middle-income American. The average middle-income American is receiving back 15% more from the Federal Government than he paid in, the top 1%-er paying about 34%. Here, we have an interesting conclusion. On average, and there are exceptions but on average, only the top 40% are net payers into the Federal Government. This raises an interesting point because every time someone says, "Well, we should cut taxes," someone else responds with, "Well, you mean tax cuts for the rich." But in fact, our tax system, at least at the federal level, has become so progressive that virtually every tax cut, by definition, is a tax cut for the rich because on average, those are the only people who are actually paying. Myth number seven, the government can settle its debts by selling off its assets. The government has some debts and unfunded obligations of about $150 trillion but it's also sitting on a bunch of assets, 8,000 tons of gold in Fort Knox, 500 million acres of land out in the West and Midwest, and then miscellaneous assets on top of that. These total actually only about 2 or $3 trillion. When we're done, even if the Federal Government were to sell off all of its assets, we still have a shortfall of $147 trillion. Myth number eight, the government needs to pay off its debts. The good news here is the government actually doesn't need to pay off its debt. Just as a household with a credit card does not have to pay off the credit card, all it has to do is keep up with the minimum monthly payments, so too the government only needs to keep up with its minimum monthly payments. We call this servicing the debt. The bad news is if we count all of the money the Federal Government owes, $150 trillion, and the Federal Government currently pays about 2.5% on its debt, to service the full $150 trillion of obligations, the Federal Government would have to come up with $3.8 trillion per year. That is, to service the debt and obligations the Federal Government currently has, it would have to pay $3.8 trillion a year in interest. Yet, the Federal Government's annual income is only about 3.3 trillion. That is, the Federal Government actually is bankrupt right now. Even if it were to devote all of the tax revenue it collects solely to servicing its $150 trillion in debt and obligations, it still would not have enough money to service that debt. Myth number nine, well, the government could just keep on borrowing. The problem here is the government has borrowed so much money that it's running out of places to find more. Currently, the American people, state and local governments have loaned about $6 trillion to the Federal Government. Social Security, Medicare, Veterans Benefits trust funds have loaned about $5 trillion to the Federal Government. Foreign governments have loaned another 4 trillion. The Federal Reserve has loaned 3 trillion, and foreign people have loaned about 2 trillion. This is the total amount of money that people the world over have loaned to the Federal Government. The problem with this is Social Security, Medicare, Veterans Benefits trust funds have run out of money. They have no more left to loan to the Federal Government. In fact, in the case of Social Security and Medicare, they're starting to pull back the money that they had loaned to the Federal Government, which they now need to turn over to retirees in the form of benefits. Foreign governments and foreign people have been slowing the growth of their lending to the Federal Government. The American people, state and local governments have been slowing, and in some cases, actually cutting back on how much they loan the Federal Government. That means that as time moves forward and the Federal Government wants to borrow more and more money and these groups are all tending to cut back on how much they loan, the one place left the Federal Government can turn to for money is the Federal Reserve. The problem here is when the government borrows from the Federal Reserve, unlike its borrowing from any of these other groups, it creates inflation. Inflation is a tax on savings. In effect, as the Federal Government runs out of places to borrow, it must turn to the Federal Reserve to borrow money. When it does that, it creates inflation, which erodes the purchasing power of all of our savings. Myth number 10, there's no way to fix this problem. It turns out that there is. We could have a balanced budget within five years if we followed this recipe. First, cut all spending this year by 10%, no exceptions. If there's some things you don't want to cut by 10%, then cut something else by more so that when you're done, in total, you have cut by 10%. When I say cut by 10%, I mean the word in the way any normal human being uses it. When politicians say, "Cut the budget," what they mean is to increase the budget by less than they would actually like. This is a actual 10% cut. We spend 10% less than we did the year before. Then hold spending constant for four years, don't even adjust for inflation. What happens over these four years is as the government holds its spending constant, the economy continues to grow. At the end of the fifth year, the economy is now large enough that it can support the government that exists. At the end of the fifth year, we'll have our first balanced budget. Thereafter, the Federal Government can continue to increase its spending if it likes, provided that the increase does not outpace the growth rate of the economy as a whole. This solution stops the bleeding. It prevents the debt problem from getting worse, but it doesn't solve the debt problem. However, we can grow out of this. It took perhaps 100 years for our debt problem to grow to the size it is now. If we can stop the problem from getting worse, over the course of the next 50 or 100 years, the economy will grow enough that the current $150 trillion debt won't matter.



The sealing of the Bank of England Charter (1694)
The sealing of the Bank of England Charter (1694)

During the Early Modern era, European monarchs would often default on their loans or arbitrarily refuse to pay them back. This generally made financiers wary of lending to the king and the finances of countries that were often at war remained extremely volatile.

The creation of the first central bank in England—an institution designed to lend to the government—was initially an expedient by William III of England for the financing of his war against France. He engaged a syndicate of city traders and merchants to offer for sale an issue of government debt. This syndicate soon evolved into the Bank of England, eventually financing the wars of the Duke of Marlborough and later Imperial conquests.

Centre: George III, drawn as a paunchy man with pockets bulging with gold coins, receives a wheel-barrow filled with the money-bags from William Pitt, whose pockets also overflow with coin. To the left, a quadriplegic veteran begs on the street. To the right, George, Prince of Wales, is depicted dressed in rags.
A new way to pay the National Debt, James Gillray, 1786. King George III, with William Pitt handing him another moneybag.

The establishment of the bank was devised by Charles Montagu, 1st Earl of Halifax, in 1694, to the plan which had been proposed by William Paterson three years before, but had not been acted upon.[5] He proposed a loan of £1.2m to the government; in return the subscribers would be incorporated as The Governor and Company of the Bank of England with long-term banking privileges including the issue of notes. The Royal Charter was granted on 27 July through the passage of the Tonnage Act 1694.[6]

The founding of the Bank of England revolutionised public finance and put an end to defaults such as the Great Stop of the Exchequer of 1672, when Charles II had suspended payments on his bills. From then on, the British Government would never fail to repay its creditors.[7] In the following centuries, other countries in Europe and later around the world adopted similar financial institutions to manage their government debt.

1815, at the end of the Napoleonic Wars, British government debt reached a peak of more than 200% of GDP.[8]

Government and sovereign bonds

Public debt as a percent of GDP, evolution for USA, Japan and the main EU economies.
Public debt as a percent of GDP, evolution for USA, Japan and the main EU economies.
Public debt as a percent of GDP by CIA (2012)
Public debt as a percent of GDP by CIA (2012)
Government debt as a percent of GDP by IMF (2018)
Government debt as a percent of GDP by IMF (2018)

A government bond is a bond issued by a national government. Such bonds are most often denominated in the country's domestic currency. Sovereigns can also issue debt in foreign currencies: almost 70% of all debt in 2000 was denominated in US dollars.[9] Government bonds are sometimes regarded as risk-free bonds, because national governments can if necessary create money de novo to redeem the bond in their own currency at maturity. Although many governments are prohibited by law from creating money directly (that function having been delegated to their central banks), central banks may provide finance by buying government bonds, sometimes referred to as monetizing the debt.

Government debt, synonymous to sovereign debt,[10] can be issued either in domestic or foreign currencies. Investors in sovereign bonds denominated in foreign currency have exchange rate risk: the foreign currency might depreciate against the investor's local currency. Sovereigns issuing debt denominated in a foreign currency may furthermore be unable to obtain that foreign currency to service debt. In the 2010 Greek debt crisis, for example, the debt is held by Greece in Euros, and one proposed solution (advanced notably by World Pensions Council (WPC) financial economists) is for Greece to go back to issuing its own drachma.[11][12] This proposal would only address future debt issuance, leaving substantial existing debts denominated in what would then be a foreign currency, potentially doubling their cost[13]

By country

General government debt as percent of GDP, United States, Japan, Germany.
General government debt as percent of GDP, United States, Japan, Germany.
Interest burden of public debt with respect to GDP.
Interest burden of public debt with respect to GDP.
National Debt Clock outside the IRS office in NYC, April 20, 2012
National Debt Clock outside the IRS office in NYC, April 20, 2012

Public debt is the total of all borrowing of a government, minus repayments denominated in a country's home currency. CIA's World Factbook lists only the percentages of GDP; the total debt and per capita amounts have been calculated in the table below using the GDP (PPP) and population figures of the same report.

A debt to GDP ratio is one of the most accepted ways of assessing the significance of a nation's debt. For example, one of the criteria of admission to the European Union's euro currency is that an applicant country's debt should not exceed 60% of that country's GDP.

National public debts greater than 0.5% of world public debt, 2012 estimates (CIA World Factbook 2013)[14]
country public debt
(billion USD)
% of GDP per capita (USD) % of world public debt
World 56,308 64% 7,936 100.0%
 United States* 17,607 74% 55,630 31.3%
 Japan 9,872 214% 77,577 17.5%
 China 3,894 32% 2,885 6.9%
 Germany 2,592 82% 31,945 4.6%
 Italy 2,334 126% 37,956 4.1%
 France 2,105 90% 31,915 3.7%
 United Kingdom 2,064 89% 32,553 3.7%
 Brazil 1,324 55% 6,588 2.4%
 Spain 1,228 85% 25,931 2.2%
 Canada 1,206 84% 34,902 2.1%
 India 995 52% 830 1.8%
 Mexico 629 35% 5,416 1.1%
 South Korea 535 34% 10,919 1.0%
 Turkey 489 40% 6,060 0.9%
 Netherlands 488 69% 29,060 0.9%
 Egypt 479 85% 5,610 0.9%
 Greece 436 161% 40,486 0.8%
 Poland 434 54% 11,298 0.8%
 Belgium 396 100% 37,948 0.7%
 Singapore 370 111% 67,843 0.7%
 Taiwan 323 36% 13,860 0.6%
 Argentina 323 42% 7,571 0.6%
 Indonesia 311 25% 1,240 0.6%
 Russia 308 12% 2,159 0.6%
 Portugal 297 120% 27,531 0.5%
 Thailand 292 43% 4,330 0.5%
 Pakistan 283 50% 1,462 0.5%

* US data exclude debt issued by individual US states, as well as intra-governmental debt; intra-governmental debt consists of Treasury borrowings from surpluses in the trusts for Federal Social Security, Federal Employees, Hospital Insurance (Medicare and Medicaid), Disability and Unemployment, and several other smaller trusts; if data for intra-government debt were added, "Gross Debt" would increase by about one-third of GDP. The debt of the United States over time is documented online at the Department of the Treasury's website TreasuryDirect.Gov[15] as well as current totals.[16]

Outdated Tables
Public Debt Top 20, 2010 estimate (CIA World Factbook 2011)[17]
Country Public Debt
(billion USD)
% of GDP per capita (USD) Note (2008 estimate)
(billion USD)
 USA $9,133   62% $29,158 ($5,415,   38%)
 Japan $8,512 198% $67,303 ($7,469, 172%)
 Germany $2,446   83% $30,024 ($1,931,   66%)
 Italy $2,113 119% $34,627 ($1,933, 106%)
 India $2,107   52% $   1,489 ($1,863,   56%)
 China $1,907   19% $   1,419 ($1,247,   16%)
 France $1,767   82% $27,062 ($1,453,   68%)
 UK $1,654   76% $26,375 ($1,158,   52%)
 Brazil $1,281   59% $   6,299 ($    775,   39%)
 Canada $1,117   84% $32,829 ($    831,   64%)
 Spain $    823   60% $17,598 ($    571,   41%)
 Mexico $    577   37% $   5,071 ($    561,   36%)
 Greece $    454 143% $42,216 ($    335,   97%)
 Netherlands $    424   63% $25,152 ($    392,   58%)
 Turkey $    411   43% $   5,218 ($    362,   40%)
 Belgium $    398 101% $38,139 ($    350,   90%)
 Egypt $    398   80% $   4,846 ($    385,   87%)
 Poland $    381   53% $   9,907 ($    303,   45%)
 South Korea $    331   23% $   6,793 ($    326,   24%)
 Singapore $    309 106% $65,144
 Taiwan $    279   34% $12,075

Debt of sub-national governments

Municipal, provincial, or state governments may also borrow. Municipal bonds, "munis" in the United States, are debt securities issued by local governments (municipalities).

Denominated in reserve currencies

Governments often borrow money in a currency in which the demand for debt securities is strong. An advantage of issuing bonds in a currency such as the US dollar, the pound sterling, or the euro is that many investors wish to invest in such bonds. Countries such as the United States, Germany, Italy and France have only issued in their domestic currency (or in the Euro in the case of Euro members).

Relatively few investors are willing to invest in currencies that do not have a long track record of stability. A disadvantage for a government issuing bonds in a foreign currency is that there is a risk that it will not be able to obtain the foreign currency to pay the interest or redeem the bonds. In 1997 and 1998, during the Asian financial crisis, this became a serious problem when many countries were unable to keep their exchange rate fixed due to speculative attacks.


Although a national government may choose to default for political reasons, lending to a national government in the country's own sovereign currency is generally considered "risk free" and is done at a so-called "risk-free interest rate." This is because the debt and interest can be repaid by raising tax receipts (either by economic growth or raising tax revenue), a reduction in spending, or by creating more money. However, it is widely considered that this would increase inflation and thus reduce the value of the invested capital (at least for debt not linked to inflation). This has happened many times throughout history, and a typical example of this is provided by Weimar Germany of the 1920s, which suffered from hyperinflation when the government massively printed money, because of its inability to pay the national debt deriving from the costs of World War I.

In practice, the market interest rate tends to be different for debts of different countries. An example is in borrowing by different European Union countries denominated in euros. Even though the currency is the same in each case, the yield required by the market is higher for some countries' debt than for others. This reflects the views of the market on the relative solvency of the various countries and the likelihood that the debt will be repaid. Further, there are historical examples where countries defaulted, i.e., refused to pay their debts, even when they had the ability of paying it with printed money. This is because printing money has other effects that the government may see as more problematic than defaulting.

A politically unstable state is anything but risk-free as it may—being sovereign—cease its payments. Examples of this phenomenon include Spain in the 16th and 17th centuries, which nullified its government debt seven times during a century, and revolutionary Russia of 1917 which refused to accept the responsibility for Imperial Russia's foreign debt.[18] Another political risk is caused by external threats. It is mostly uncommon for invaders to accept responsibility for the national debt of the annexed state or that of an organization it considered as rebels. For example, all borrowings by the Confederate States of America were left unpaid after the American Civil War. On the other hand, in the modern era, the transition from dictatorship and illegitimate governments to democracy does not automatically free the country of the debt contracted by the former government. Today's highly developed global credit markets would be less likely to lend to a country that negated its previous debt, or might require punishing levels of interest rates that would be unacceptable to the borrower.

U.S. Treasury bonds denominated in U.S. dollars are often considered "risk free" in the U.S. This disregards the risk to foreign purchasers of depreciation in the dollar relative to the lender's currency. In addition, a risk-free status implicitly assumes the stability of the US government and its ability to continue repayments during any financial crisis.

Lending to a national government in a currency other than its own does not give the same confidence in the ability to repay, but this may be offset by reducing the exchange rate risk to foreign lenders. On the other hand, national debt in foreign currency cannot be disposed of by starting a hyperinflation;[citation needed] and this increases the credibility of the debtor. Usually small states with volatile economies have most of their national debt in foreign currency. For countries in the Eurozone, the euro is the local currency, although no single state can trigger inflation by creating more currency.

Lending to a local or municipal government can be just as risky as a loan to a private company, unless the local or municipal government has sufficient power to tax. In this case, the local government could to a certain extent pay its debts by increasing the taxes, or reduce spending, just as a national one could. Further, local government loans are sometimes guaranteed by the national government, and this reduces the risk. In some jurisdictions, interest earned on local or municipal bonds is tax-exempt income, which can be an important consideration for the wealthy.

Clearing and defaults

Public debt clearing standards are set by the Bank for International Settlements, but defaults are governed by extremely complex laws which vary from jurisdiction to jurisdiction. Globally, the International Monetary Fund can take certain steps to intervene to prevent anticipated defaults. It is sometimes criticized for the measures it advises nations to take, which often involve cutting back on government spending as part of an economic austerity regime. In triple bottom line analysis, this can be seen as degrading capital on which the nation's economy ultimately depends.

Those considerations do not apply to private debts, by contrast: credit risk (or the consumer credit rating) determines the interest rate, more or less, and entities go bankrupt if they fail to repay. Governments need a far more complex way of managing defaults because they cannot really go bankrupt (and suddenly stop providing services to citizens), albeit in some cases a government may disappear as it happened in Somalia or as it may happen in cases of occupied countries where the occupier doesn't recognize the occupied country's debts.

Smaller jurisdictions, such as cities, are usually guaranteed by their regional or national levels of government. When New York City declined into what would have been a bankrupt status during the 1970s (had it been a private entity), by the mid-1970s a "bailout" was required from New York State and the United States. In general, such measures amount to merging the smaller entity's debt into that of the larger entity and thereby giving it access to the lower interest rates the larger entity enjoys. The larger entity may then assume some agreed-upon oversight in order to prevent recurrence of the problem.

Economic policy basis

According to Modern Monetary Theory, public debt is seen as private wealth and interest payments on the debt as private income. The outstanding public debt is an expression of the accumulated previous budget deficits which have added financial assets to the private sector, providing demand for goods and services. Adherents of this school of economic thought argue that the scale of the problem is much less severe than is popularly supposed.[19]

Wolfgang Stützel showed with his Saldenmechanik (Balances Mechanics) how a comprehensive debt redemption would compulsorily force a corresponding indebtedness of the private sector, due to a negative Keynes-multiplier leading to crisis and deflation.[20]

In the dominant economic policy generally ascribed to theories of John Maynard Keynes, sometimes called Keynesian economics, there is tolerance for fairly high levels of public debt to pay for public investment in lean times, which, if boom times follow, can then be paid back from rising tax revenues. Empirically, however, sovereign borrowing in developing countries is procyclical, since developing countries have more difficulty accessing capital markets in lean times.[21]

As this theory gained global popularity in the 1930s, many nations took on public debt to finance large infrastructural capital projects—such as highways or large hydroelectric dams. It was thought that this could start a virtuous cycle and a rising business confidence since there would be more workers with money to spend. Some[who?] have argued that the greatly increased military spending of World War II really ended the Great Depression. Of course, military expenditures are based upon the same tax (or debt) and spend fundamentals as the rest of the national budget, so this argument does little to undermine Keynesian theory. Indeed, some[who?] have suggested that significantly higher national spending necessitated by war essentially confirms the basic Keynesian analysis (see Military Keynesianism).

Nonetheless, the Keynesian scheme remained dominant, thanks in part to Keynes' own pamphlet How to Pay for the War, published in the United Kingdom in 1940. Since the war was being paid for, and being won, Keynes and Harry Dexter White, Assistant Secretary of the United States Department of the Treasury, were, according to John Kenneth Galbraith, the dominating influences on the Bretton Woods agreements. These agreements set the policies for the Bank for International Settlements (BIS), International Monetary Fund (IMF), and World Bank, the so-called Bretton Woods Institutions, launched in the late 1940s for the last two (the BIS was founded in 1930).

These are the dominant economic entities setting policies regarding public debt. Due to its role in setting policies for trade disputes, the World Trade Organization also has immense power to affect foreign exchange relations, as many nations are dependent on specific commodity markets for the balance of payments they require to repay debt.

Structure and risk of a public debt

Understanding the structure of public debt and analyzing its risk requires one to:

  • Assess the expected value of any public asset being constructed, at least in future tax terms if not in direct revenues. A choice must be made about its status as a public good—some public "assets" end up as public bads, such as nuclear power plants which are extremely expensive to decommission—these costs must also be worked into asset values.
  • Determine whether any public debt is being used to finance consumption, which includes all social assistance and all military spending.
  • Determine whether triple bottom line issues are likely to lead to failure or defaults of governments—say due to being overthrown.
  • Determine whether any of the debt being undertaken may be held to be odious debt, which might permit it to be disavowed without any effect on a country's credit status. This includes any loans to purchase "assets" such as leaders' palaces, or the people's suppression or extermination. International law does not permit people to be held responsible for such debts—as they did not benefit in any way from the spending and had no control over it.
  • Determine if any future entitlements are being created by expenditures—financing a public swimming pool for instance may create some right to recreation where it did not previously exist, by precedent and expectations.


Sovereign debt problems have been a major public policy issue since World War II, including the treatment of debt related to that war, the developing country "debt crisis" in the 1980s, and the shocks of the 1998 Russian financial crisis and Argentina's default in 2001.

Implicit debt

Government "implicit" debt is the promise by a government of future payments from the state. Usually this refers to long-term promises of social payments such as pensions and health expenditure; not promises of other expenditure such as education or defense (which are largely paid on a "quid pro quo" basis to government employees and contractors).

A problem with these implicit government insurance liabilities is that it is hard to cost them accurately, since the amounts of future payments depend on so many factors. First of all, the social security claims are not "open" bonds or debt papers with a stated time frame, "time to maturity", "nominal value", or "net present value".

In the United States, as in most other countries, there is no money earmarked in the government's coffers for future social insurance payments. This insurance system is called PAYGO (pay-as-you-go). Alternative social insurance strategies might have included a system that involved save and invest.

Furthermore, population projections predict that when the "baby boomers" start to retire, the working population in the United States, and in many other countries, will be a smaller percentage of the population than it is now, for many years to come. This will increase the burden on the country of these promised pension and other payments—larger than the 65 percent[22] of GDP that it is now. The "burden" of the government is what it spends, since it can only pay its bills through taxes, debt, and increasing the money supply (government spending = tax revenues + change in government debt held by public + change in monetary base held by the public). "Government social benefits" paid by the United States government during 2003 totaled $1.3 trillion.[23]

In 2010 the European Commission required EU Member Countries to publish their debt information in standardized methodology, explicitly including debts that were previously hidden in a number of ways to satisfy minimum requirements on local (national) and European (Stability and Growth Pact) level.[24]

See also

Government finance:




  1. ^ "Bureau of the Public Debt Homepage". United States Department of the Treasury. Archived from the original on October 13, 2010. Retrieved October 12, 2010.
  2. ^ "FAQs: National Debt". United States Department of the Treasury. Archived from the original on October 21, 2010. Retrieved October 12, 2010.
  3. ^ The Economics of Money, Banking, and the Financial Markets 7ed, Frederic S. Mishkin
  4. ^ Tootell, Geoffrey. "The Bank of England's Monetary Policy" (PDF). Federal Reserve Bank of Boston. Retrieved 22 March 2017.
  5. ^ Committee of Finance and Industry 1931 (Macmillan Report) description of the founding of Bank of England. 1979. ISBN 9780405112126. Retrieved 10 May 2010. "Its foundation in 1694 arose out the difficulties of the Government of the day in securing subscriptions to State loans. Its primary purpose was to raise and lend money to the State and in consideration of this service it received under its Charter and various Act of Parliament, certain privileges of issuing bank notes. The corporation commenced, with an assured life of twelve years after which the Government had the right to annul its Charter on giving one year's notice. Subsequent extensions of this period coincided generally with the grant of additional loans to the State"
  6. ^ H. Roseveare, The Financial Revolution 1660–1760 (1991, Longman), p. 34
  7. ^ Ferguson, Niall (2008). The Ascent of Money: A Financial History of the World. Penguin Books, London. p. 76. ISBN 9780718194000.
  8. ^ UK public spending Retrieved September 2011
  9. ^ "Empirical Research on Sovereign Debt and Default" (PDF). Federal Reserve Board of Chicago. Retrieved 2014-06-18.
  10. ^ "FT Lexicon" – The Financial Times
  11. ^ M. Nicolas J. Firzli, "Greece and the Roots the EU Debt Crisis" The Vienna Review, March 2010
  12. ^ "EU accused of 'head in sand' attitude to Greek debt crisis". Retrieved 2012-09-11.
  13. ^ "Why leaving the euro would still be bad for both Greece and the currency area" – The Economist, 2015-01-17
  14. ^ "Country Comparison :: Public debt". Retrieved May 16, 2013.
  15. ^ "Government – Historical Debt Outstanding – Annual". 2010-10-01. Retrieved 2011-11-08.
  16. ^ "Debt to the Penny (Daily History Search Application)". Retrieved 2014-02-03.
  17. ^ "Country Comparison :: Public debt". Archived from the original on October 15, 2008. Retrieved November 8, 2011.
  18. ^ Hedlund, Stefan (2004). "Foreign Debt". Encyclopedia of Russian History (reprinted in Retrieved 3 March 2010.
  19. ^ Debts, Deficits and MMT
  20. ^ Wolfgang Stützel: Volkswirtschaftliche Saldenmechanik Tübingen : Mohr Siebeck, 2011, Nachdr. der 2. Aufl., Tübingen, Mohr, 1978, S. 86
  21. ^ "The Economics and Law of Sovereign Debt and Default" (PDF). Journal of Economic Literature. 2009. Retrieved 2014-06-18.
  22. ^ "Report for Selected Countries and Subjects". International Monetary Fund. Retrieved 2010-10-12.(General government gross debt 2008 estimates rounded to one decimal place)
  23. ^ "Government Social Benefits Table". Archived from the original on November 1, 2004.
  24. ^ "Council Regulation (EC) No 479/2009". Retrieved 2011-11-08.

External links

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