I’m a longtime reader of Catallay files and have the following question. With the US, UK, Euro zone and now us all in varying levels of debt, to whom is this debt owed? Is the whole globe some zero sum game of countries owing money to other countries or does it not work like that? I’ve never heard in the media of a country that is in credit.
So in the first instance who actually owns the debt as in who receives the coupon payments is straight-forward. Investors own the debt. Those investors may be (domestic or foreign) banks, pension (superannuation) funds, hedge funds, and the like. Those investors also include foreign governments and their agencies such as Sovereign Wealth Funds. It is not correct, however, to think of the owners of the debt being foreign countries. It is easy to fall into that way of thinking because that’s often how we talk about it. So we might say something like, “Australia is selling a lot of bonds to the United States”. What we really mean to say is that American investors are buying a lot of Australian bonds.
This table at the Australian Office of Financial Management shows the geographic distribution of Australian Government Bond ownership as at December 2012. Note how the table is labelled:
Beneficial Ownership by Country of Residence of Australian Government Securities and State Government Securities Guaranteed by the Australian Government
So that table isn’t telling us that China, Japan and Korea own 6.6 percent of “our” debt. It tells that investors resident in those countries own 6.6 percent of Australian government debt.
That data are a guesstimate, as the AOFM tells us:
To ascertain the country of beneficial ownership of the securities covered by the legislation, the AOFM has reviewed where possible the ownership records of the registry or depository systems in which they are held. The AOFM has reviewed the name of the accounts which are registered as holding these securities and from this information and knowledge of the business identified sought to form opinions on the country of domicile of the beneficial owners. However this information is insufficient to ascertain beneficial ownership where securities are listed as held by custodians or nominees.
As the legislation does not provide the AOFM with the power to compel security holders, custodians and nominees to provide AOFM with information on the beneficial ownership of securities, the AOFM has been restricted to information provided on a voluntary basis from these sources.
But I suspect it is fairly accurate.
The more interesting question is whether the domicile of the ownership matters. So looking at the table it turns out that 64.6 percent of Australian government debt is owned by Australian domiciled investors. So “we owe it to ourselves”. The short answer is no – it does not matter who owns the debt it has to be paid back, in full, and on time. Of course, if government doesn’t intend to pay the money back then it does matter – it is easier to steal from your own citizens and residents than it is from foreigners.
Now the “we-owe-it-to-ourselves” fallacy rests on the notion that there is no difference between investors who choose to buy bonds now and taxpayers who are coerced to pay taxes to pay back the money borrowed. This point has been repeatedly explained by James Buchanan – as Don Boudreaux explains:
A central point of Jim Buchanan’s debt-burden case is that even within national boundaries, the individuals whose taxes are raised today to pay interest or principal on a government bond are distinct from the bond holders who receive those payments. The payer is not the payee, and that the latter might share national citizenship with the former is an economically irrelevant happenstance that cannot possibly make a government-debt burden disappear.
That American Mr. Smith’s taxes are raised to pay to retire a bond held by American Ms. Jones does not mean that this “internally held” debt isn’t burdensome. Mr. Smith bears the burden – a burden that is not offset simply because the individual, Ms. Jones, who receives the proceeds of the taxes paid by Mr. Smith happens also to be an American. The burden of this public debt for Mr. Smith would be changed not one iota if, a moment before he is taxed to pay off this bond, Ms. Jones were to switch her citizenship from American to Armenian.
Arnold Kling explains the distributional problems that arise from public debt here.
Update: I’ve emphasised that the investors who own debt may be domestic or foreign.