Who owns the debt?

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.

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14 Responses to Who owns the debt?

  1. MattR

    Very interesting, I never actually asked this question before. One thing I think this is relevant is inequality of wealth within an economy, or at least the ‘inequality’ that the left keep harping on about that is supposedly because of ‘evil’ capitalism.

    A government that goes into defecit and finances this defecit by selling bonds to investors, who are almost entirely in the higher income brackets, are in essence taxing the majority to pay an income to a rich minority.

    It has always been my argument, and the argument of most libertarians I’m sure, that inequality is perfectly fine, if not desirable, so long as it results purely from private sector endevours, free of any government special treatment. However, inequality arising due to government actions is entirely unacceptable. This certainly falls under that banner.

    What this would do, also, is create a class that are addicted to government defecits, not because of welfare payments, but because of the income it creates for them. Essentially another form of crony capitalism.

    I wonder if our leftist/keynesian friends have ever considered even the possiblity that their ideas are directly causing the worst possible kind of inequality? I’d bet my house on ‘no’.

  2. Is the long time reader referring to government debt or private debt or the sum of? In both cases there are plenty of countries that do not have net debt. Currently as a general rule the so called rich countries are borrowing off the so called poor countries.

  3. conrad

    “It is easier to steal from your own citizens and residents than it is from foreigners.”

    At least for bonds and the like, I imagine it’s actually easier to steal from the citizens of other countries than your own, since they have no real ability to get their money back. Just look at Greece and the EU, and that’s country to country, let alone if it was just citizens of other countries that held the debt.

  4. Roger

    I read some time ago that China (as a nation) held in its Reserves some US$3trillion in US bonds however due to mounting concerns in the continuing depreciation of the real value of the US$ China had been buying alternative assets using those bonds. Stuff like Australian farms, gold, etc. It seems logical and sensible (particularly if the US default) but is it true?

  5. “I wonder if our leftist/keynesian friends have ever considered even the possiblity that their ideas are directly causing the worst possible kind of inequality? I’d bet my house on ‘no’.”

    I’d bet my house “yes”. Since when was robbing from the rich(er than them) against their “principles”?

  6. JamesK

    Obummer campaigning on the Letterman Show to answer probing questions as is his wont:


    Obama On Debt: “We Don’t Have To Worry About It Short Term”

    President Obama addressed the debt and deficit, saying it is not a problem in the “short term,” during an appearance on CBS’s “Late Show” with host David Letterman. Obama also said he did not know what the national debt was when he took office.

    When a concerned Letterman asked him about the debt, Obama laid the responsibility for the U.S. national debt and deficit on his predecessor former President George W. Bush.

    “Well, here’s what happened. We had a surplus when Bill Clinton was president,” Obama said. “It was projected to continue to be a surplus. We decided to launch two wars on a credit card. We cut taxes twice without finding offsetting costs for it or ways to pay for it, a prescription drug plan and then we had a massive recession.”

    “When I walked into office we had a trillion dollar deficit, debt had mounted and then we had to take a bunch of emergency measures, that cost money, saving the auto industry, making sure that the financial system got back on track,” Obama said.

    “So now what we’ve got to do is we’ve got to pare down that deficit, get that debt under control and I think the only way we’ve ever been able to do that effectively is when you do it in a balanced way,” Obama explained.

    When asked if he remember what the national debt was when he entered office, President Obama said “I don’t know what the number was precisely.” Obama told Letterman “we don’t have to worry about it short term.”

    “A lot of it we owe to ourselves. Because if you invest in a treasury bill or something like that then essentially you’re loaning the government money. In fact, the majority of it is held by folks who live here, but we don’t have to worry about it short term,” Obama said.

    “Right now interest rates are low because people still consider the United States the safest and greatest country on earth, rightfully so, but it is a problem long term and even medium-term. And so we’re going to have to take care of this debt and deficit, but we’ve got to do it in a balanced way,” he added.

    So according to Obummer as the debt he has increased from 60% of GDP to 110% of GDP in 4 years is owed to Americans it’s not such a pressing problem, apparently

  7. jumpnmcar

    This is too deep for the likes of me.
    All I know is I’m paying the interest as an individual borrower.
    I’m paying the interest on local council debt as a rate payer.
    I’m paying the interest on state debt.
    And I’m paying the interest on Federal debt.
    I hope we don’t discover intelligent life on another planet or I’ll be paying the interest on the debt we humans will inevitably owe them.

  8. brc

    The fundamental problem is that people confuse individuals with a government, and think they are the same thing.

    It’s all very well to say ‘we owe it to ourselves’ but if the government stops paying, a lot of pension funds and other income-reliant instruments are going to stop paying people, and they’re going to lose just about everything.

    This kinds of woolly thinking is designed to obscure what is going on sufficiently to allow it to continue indefinitely. Well, it can’t and it won’t.

  9. Aliice

    LOl Jump its just about right.

    They are also raising super so you can pay the interest on the debt every tome the share market crashes.

    There is now three things you can be sure of and one you cant be sure of
    a) death, b) taxes c) unterest d) super

    d) which you may never see because of a) b) and c).

  10. Mother Hubbard's Dog

    A more relevant question for Australia is our long term CAD. When, I wonder, do our government think we will finally manage to finance our own investments, our own borrowings for housing and our own consumption? Not to mention managing to actually reduce the interest bill on our collective overseas borrowings.

  11. I’ve always wondered why the government keeps borrowing money off the banks, when they could pay off the debt, self fund, and keep all that interest to itself.
    Or even give it back to the taxpayers.

  12. The truly productive and their kids pay for everything either now or in the future. Socialists think they own everything and let you keep a bit of it. Lucky for the USA the productive own guns and are prepared to use them to stop the Socialists from taking all of it.

  13. Bruce

    As a result of Basel III a lot more government bonds are being held by banks around the world.

    Also there is a degree of soft coercion since banks in the US and EU must buy their own governments’ bonds or incur the wrath of those governments. After the GFC banks have no means to defend against government standover tactics.

    As a result most of the bonds of countries like Greece and Spain are owned by their own banks. If the country goes down so do the banks. And possibly the EU too due to LTRO-style recycling of dodgy government bonds as collateral into cold hard cash via the ECB.

  14. .

    If we have a persistent CAD, it is because of persistent inflation.

    Tackle inflation first, then what happens next is going to be desirable.

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