On Friday, I shared an infographic to show that America’s National/Sovereign Debt is up to $19 trillion or so. This has a lot of people concerned. And then, of course, you have Donald J. Trump dancing around the edges, sort of vaguely threatening/suggesting that he’ll negotiate the repayments down to 85 cents on the dollar or something.
So the question is: if he did that, who would he be negotiating with?
Here’s a picture of the main holders of the US National Debt (as of February this year):
Over two thirds of America’s debt is owned by Americans. And even then, at least $5 trillion of that is owned/managed by the Government itself (mainly the Social Security funds – but also others).
And as for the other slightly-less-than-a-third of foreign owners of the debt, here’s a ticker listing from the National Treasury in July 2016:
I’m putting that up there because it seems to me that an inordinate number of tax havens are chilling near the top of that list (Ireland, the Cayman Islands, Switzerland, Luxembourg, etc). Which, truthfully, is probably a lot of American money anyway (Apple’s cash stockpile is no doubt sitting in that Irish account).
What I’m trying to say is: most of America’s debt is America’s government borrowing money from America’s wealthy. Which, equally, you could re-phrase as America’s wealthy asking America’s government to hang on to their savings while they’re not using them.
And what are savings for wealthy people anyway?
To generalise broadly, savings mean different things to different classes:
- The Poor – do not generally have savings. And if they do, it’s to cover big expenses like funerals, medical costs, etc.
- The Middle Class – have some savings which go toward future non-essential expenses (like holidays and private-schooling for their children), and possibly some untouchable savings like a pension fund to cover a future retirement that will hopefully be comfortable.
- The Rich though – “live off the interest”.
The point is: the wealthy have a lot more passive income than they do salaries. They’ve reached a point where they have accumulated enough capital that the return on their capital:
- Pays for their lifestyle; and
- Adds to their already-accumulated capital.
And where does this capital end up in order to earn its returns? In government bonds. And equities. And other investments.
So when people say things like “What happens when the government debt can’t be repaid?” – one appropriate response is “Who said anything about having it repaid?”
Because once you’re above a certain income bracket: the money that you are saving today is not being saved so that you can spend it tomorrow. It is being saved so that, one day, you can live off the interest. And if that money gets repaid, you’ll need to find someplace else to put it so that you can continue earning the interest.
And given that much of the world’s wealth is – well – owned by the wealthy, we’re talking about some fairly indefinite capital investments (in government debt, equity markets, property, etc).
Which is the reason why we can be less concerned about the “global debt explosion” that many of the alarmists like to throw out into the twitterverse. It’s almost certainly less worrying than it first appears.
PS: while I was doing some background googling around this, I found a Paul Krugman op-ed which might be worth a read: “Nobody Understands Debt”
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.