As of January 2018, the US had a national debt of around US $20 trillion, the UK has a US $2.5 trillion debt, Japan has around US $9.5 trillion in debt, China has roughly US $4.6 trillion in debt, and India’s national debt stands at approximately US $1.1 trillion. (Source)
These are some of the largest economic powers in the world, and as this data clearly evidences, all of them have humongous debts. And, just for a little perspective, let me remind you that a “trillion” has 12 zeros.
We hear about the mounting national debts of countries all the time on the news, and momentarily wonder how large those debt figures are. However, have you ever paused to think about who these countries borrow from? In other words, who lends such huge amounts of money to these countries if they are already in crippling debt?
There are a few sources through which a nation’s government gets money that adds to its debts:
A country can borrow money from its own governmental institutions and subsidiaries. The US, for instance, owes around $5.6 trillion to a number of its own federal agencies, which accounts for nearly 30% of the total federal debt. If you have a thing for fancy words, you could say that 30% of the US national debt is locked in intra-governmental holdings.
That’s an interesting question.
The thing is that some governmental agencies, such as the Social Security Trust fund, the Office of Personnel Management Retirement etc., make far more revenue from taxes than they actually need. Thus, instead of hiding all that surplus cash under the mattress, these agencies buy US T-bonds (usually). In this way, they help the government with its expenses, and also get a decent interest rate on the money that they lend.
That’s pretty neat, wouldn’t you say?
As you can imagine, a sizable portion of a country’s national debt is held by other countries (this portion falls under “debt held by the public”). The US, for example, owes US $1176.6 billion to Mainland China, US $1084.1 billion to Japan, US $328.7 billion to Ireland and similar amounts on the order of billions to many other foreign countries (Source). So, how do these countries actually lend money to the US?
Debt is usually issued through US treasury notes/bonds. What these foreign countries do is that they buy US treasury bonds (casually referred to as ‘T-bonds’). These treasury bonds are considered ‘liquid assets’, as they can be readily sold and don’t generally lose value (except in certain unforeseen events, such as the great economic slowdown that hit the US in 2008).
In other cases, a neighboring country can actually provide huge sums of money to aid a nation in some way. That also adds to the debt of the latter country.
Yes, even the citizens of a nation lend money to the government, which adds to the national debt.
The other major player who lends money to a nation is the general public! The debt held by the public forms a major chunk of the total debt of a country. Just like foreign countries, people can also buy bonds issued by the government, thus lending it money.
A lot of people want to loan money to governments, because they know that they will get their money back, along with handsome interest on the sum. Ever heard of a debt mutual fund? This kind of fund primarily invests in a mix of debt or fixed income securities, such as government securities, treasury bills, corporate bonds etc. This fund generally has a fixed rate of interest and is largely considered a ‘safe investment’ because, well, it is an investment in the government.
So, if you invest in a debt mutual fund, you essentially lend money to your government.
This is just a brief outline of a few major sources of a country’s debt; in reality, a country’s debt is an insanely complicated entity, comprising hundreds of contributors and subtractors. A nation borrows money from many sources, and uses it to meet its expenses, most of which are ultimately targeted towards the growth of its economy and people.
- TreasuryDirect.gov (Link 1)
- TreasuryDirect.gov (Link 2)
- TreasuryDirect.gov (Link 3)
- University of Pennsylvania
- Brookings Institution
- University of North Texas