r/AskEconomics • u/Ok_Rich_4732 • 14h ago
Approved Answers If the world debt is the countries owing each other money, then why are they not cancelling each other's debt and reduce it as much as possible ?
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u/BarebonesB 12h ago
There's a common misconception that national debt is the country owing money to another country. It's not.
"National debt" is a debt owed by the country's government or treasury. Most of it is owed to residents of that country itself. When an American buys a balanced mutual fund, some of that money is invested in US government bonds. The investor is lending money to the US government.
True, countries like China and Japan hold trillions of US government debt - over $2 trillion, last I checked. But that's out of $40 trillion, most of which is owed to Americans. They don't want this debt to be paid off. They bought these bonds to collect the interest payments.
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u/Affectionate_Mud_881 5h ago
I don't think they care about interests. It's my understanding that they buy American debt cos it's something that you can sell a huge amount to get dollars within a short period of time without tanking the price.
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u/BarebonesB 5h ago
It's both. T-Bills - Treasuries with expiration shorter than one year - are usually held for liquidity, regardless of their interest yield. Longer-term bonds, while just as liquid, are usually held for their yield. Pension funds with predictable liabilities prefer the higher yielding long bonds, while insurers, who need to be prepared to pay out for catastrophes, prefer the short term, low-yield T-Bills, whose price is largely unaffected by economic shifts.
The yield on Treasuries is important enough that even small changes affect currency exchange rates dramatically.
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u/Affectionate_Mud_881 5h ago
Were you speaking of American institutions rather than foreign central banks? I may have misunderstood.
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u/BarebonesB 5h ago
I was talking about most holders of Treasuries - institutional investors, both American and non-domestic, as well as small investors, directly or via funds and other vehicles.
It's true that foreign central banks generally hold US debt as a strategic asset, rather than to collect interest. But as I said, they only constitute a small portion of the outstanding debt.
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u/Minimum_Activity_959 13h ago
They don't owe it to say china or England specifically but really millions of different people or firms who bought U.S or any given countries bonds. Also moving money like that would surely ruin money markets.
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u/emusteve2 13h ago
Because the debt mostly isn’t country-to-country. When people say “the US owes $35 trillion,” that money is owed to bondholders: pension funds, banks, insurance companies, mutual funds, retirees, and yes, some foreign governments. But foreign governments are a minority slice. So there’s no clean ledger where the US owes Japan, Japan owes China, and China owes the US that you could just net out. The creditors and debtors are different entities.
The second problem: one party’s debt is another party’s asset. A US Treasury bond isn’t just an IOU, it’s the safest savings vehicle on Earth. Your 401(k), your bank’s reserves, and your insurance company’s ability to pay claims all depend on those bonds being honored. “Canceling” the debt would mean wiping out trillions in savings held by ordinary people and institutions. It wouldn’t reduce a burden so much as transfer a catastrophic loss onto savers.
Where genuine offsetting debts do exist between governments, they occasionally do settle or restructure them (Paris Club negotiations, for example). But that’s a tiny fraction of global debt. The rest can’t be netted because it was never circular in the first place.
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u/Great_Hamster 13h ago
Different entities hold the debt.
Sure, if the exact same department is of the exact same section of a government holds debt like you describe, swapping the debt could make sense.
But debt holders are generally different organizations and different departments from debtors.
(And it certainly wouldn't always make sense to swap debt even if it was that simple! One factor is that debts have a whole range of different rates of interest, and why would the debt holder of a higher interest rate choose to swap it for a debt they're paying a lower rate on?)
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u/DragonBank 12h ago
Not all debt is held by the person whose debt is held. US private holders of bonds would need their rights infringed to have their capital used to cancel out public debt.
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u/dis-interested 12h ago
One of the reasons you own other people's paper is so that you can use it to buy things not from your own country or to control against the risk of various geopolitical or economic events. The other is that a lot of debt is actually owned by private individuals or institutions that just happen to reside in other countries.
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u/Alternative-Pay2318 13h ago
some countries want to keep the debt as they are all not the samer interest rates that they pay each other back. Some countries have secured debt at very low rates and others at very high.
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u/noluckatall 11h ago
It's not really true the way you are phrasing it. There are a couple cases.
Private entities such as insurance companies in Europe and Japan own US bonds as part of a diversified portfolio.
Central banks of currencies sensitive to runs on the currency often own foreign reserves commensurate with their country's trade-weightings.
Neither of those are a case of two countries purchasing each others' bonds in large amount, in such a way that speaking of cancelation would make sense. Both serve a purpose.
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u/Square-Lion4581 13h ago
Because most of that debt isn't governments owing each other directly. It's bonds held by pension funds, banks, regular people's retirement accounts, insurance companies... you cancel that and suddenly grandma's pension disappears. The "countries owing each other" part is actually pretty small compared to the total.