What were the specific actions that US gov did in 1997 (3:10), Sweden in 1997- (3:12), UK & Greece in 1998-9 (3:19), Japan in 2003 (3:48), Germany in 2006 (4:15), Netherlands in 2008 (4:24) and 2023 (6:14), France in 2013 (5:02), US in 2021 (6:00) that caused dramatic changes in the numbers? Were they the introduction of a fiscal bill? Or the appointment of some person into a nation’s economic driver seat? Something else?
Is issuing bond the only / major way to increase external debt? If not, what are other significant methods?
In any case, there seemed to be a shift in the mindset of many countries. Does any economic school represent this kind of thinking toward debt? What are the biggest factors that drove some nations toward this trend?
Thanks! The 1st question is the most important for me to understand answers to the 2nd & 3rd, so links and/or easy-to-understand explanation are more appreciated. As my background knowledge in this field is limited, big words will confuse more than help.
I think you’re mixing up two things here. One is government debt, which is debt owed by a government to creditors. The main (not only) way to increase this is issuing government bonds. The bonds can be bought by either domestic or foreign (external) creditors, and since they’re freely tradable the ratio of domestic to foreign bondholders can change at any moment.
The other issue is external debt, which is the debt of an economy as a whole (not just the government) towards foreign countries. It can increase by increasing imports or decreasing exports and can take many forms. The crucial thing here is that debt incurred by private actors, such as companies, can also matter.
I think I get the 1st paragraph. So if a foreign actor decides to mass buy a country’s floating bonds on the (domestic) market, then its external debt could shoot up. Though I suspect the effect of this channel is rather small, not enough to explain any of the drastic changes like in the vid.
Your 2nd paragraph is harder. Let’s simplify a case of country A only increasing import from B and not changing export. Then more of B’s currency is needed, so it gains value. A loses more of its own money reserve to exchange for B’s, but in the end it has more goods. How is that incurring more debt? As per my understanding, a debt is when you get an amount of money for nothing other than a promise to pay in the future.
Do you happen to have rough figures on the ratio of private sector debt compared to gov’s, of the mentioned countries?
As far as the UK is concerned, 1997 saw the election of the Labour government under Blair and Brown, and 2010 its ejection in favour of a Conservative-led coalition. The argument over government debt is whether the overall total matters as much as the cost of servicing it, and that tends to be a major divide between parties.
You could check your dates against changes of government in the countries concerned, and external shocks to the system, e.g., oil price rises, epidemics, climatic events and the like, not to mention the financial crisis of 2008.
Suppose an American company imports something from another economy with a floating currency, say, the EU. The American importer pays in dollars (because that’s the currency the American has), but the European exporter wants payment in euros (because its own expenses, such as wages, are paid in euros). So somewhere along the way, dollars need to be exchanged for euros, which means someone needs to sell dollars on the forex markets to buy euros with them. Suppose you have a European trader who’s buying these dollars with euros. The situation now is that someone in Europe ends up having more dollars than before. These dollars are a claim on the American economy. If they’re held in a bank account with an American bank, they’re a liability of the American bank towards the European account holder; if the European invests them in government bonds, they become a claim on the U.S. government. Either way, someone in Europe now has a claim on the American economy, and conversely there’s a liability of the American economy towards that European.
Suppose the dollars are bought, on the forex market, by an American who happened to hold euros (from some previous transaction) and wants to get dollars from them. The euros are bought from this American trader and then sent to Europe to pay for the imports. In this case, the stock of euros held by Americans decreases, and since these euros constituted a claim of the American economy against the European one (but now don’t, since they flowed back to Europe), the net exposure (claims minus liabilities) of America towards Europe decreases.
Or let’s look at your example, where the goods are bought from a country with a pegged rather than free-floating currency; say China. The American importer needs renminbi to pay for the Chinese goods. This drives up demand for renminbi on the forex markets, which increases the value of renminbi relative to the dollar. The Chinese central bank, however, doesn’t want the renminbi to appreciate; it wants to preserve the exchange rate. So the Chinese central bank steps in and provides these renminbi (via money creation) to buy the dollars that the American is selling. The Chinese central bank now has these dollars, which, again, constitute a claim on the American economy, and conversely a liability of the American economy towards China’s. Most likely, the Chinese central bank will put these dollars into U.S. government bonds - that’s what it has been doing for a long time, and that’s exactly where the massive stock of U.S. government bonds held by China come from.
The net economic effect in all cases is the same: The net liabilities of the American economy towards the economy it imported the goods from increase.
The Wikipedia article on external debt has this chart (png file) that maps out the components of American external debt by sector, including government. Looks roughly like the government’s share of external debt fluctuates within the 25-35% range. The chart only goes back to 2014, though.
[Moderating]
Just a reminder that this thread is in FQ, and should be handled factually. Everyone’s doing great so far, but I want to make sure it stays that way, because this is a topic that could easily leak into politics.
With apologies to Chronos, I’d like to take a necessary detour into some economics. External debt includes public and private debt owed to nonresidents. It’s a big deal in third world countries, because they typically owe debt denominated in foreign currencies. If their currency depreciates, it becomes harder to pay interest on that debt and an economic crisis can ensue. But the overwhelming majority of US debt is denominated in dollars. So that economic statistic is less important for the US. External debt is our debt but their problem.
So much so, that I couldn’t find US external debt over at FRED, the extremely helpful data depository managed by the Federal Reserve Bank of St Louis. They do have series on the external debt for Pakistan, Egypt, Turkmenistan, etc. But not for major developed countries. Indeed I couldn’t locate online US external debt data extending from the 1990s to today. I did find a series relating to federal debt held by the public and I didn’t see much happening in 1997.
Hypothesis: the source of this information was CityGlobeTour at YouTube. 1997 could be the beginning of the US external debt series that they used to make the video. That would be highly lame, and wouldn’t explain the 2021 blip (which indeed corresponds to a sudden increase in US federal borrowing relative to other countries during the COVID pandemic). But it’s possible that some of the movements in the video could be a result of shoddy research.
I could come up with other explanations, but I’d prefer to work with a real data source rather than clickbait Youtube vids.
My knowledge of (UK) politics is almost negligible, so I can only deduce that Labour party favors debt. But I also saw somewhere recently that UK debts bubble up hugely even from '10 to '24, under Conservative… BTW, I sent you a PM about politics
External shocks are quite easy to identify, but changes in gov and specific policies are, I think, something only locals (or political hobbyists) intimately knows about. To draw connections between those 2 issues is difficult for outsiders.
Is my deduction from it correct, that when held by a foreign actor, your issued money is kinda equal to your bond, and thus all count as debt? That means all foreign currencies that any central banks hold are debts.
Does the notion extend down to individual level? If I have cash in my pocket, then my gov is indebted to me.
That begs the question, why does CCB want to preserve ex-rate at one particular ratio (and who determines the optimal ratio that CCB wants to maintain)? The rationale here is that the more you depreciate your money, the better export & stuff. So there’s no objection to you creating more & more money. If everyone joins the race and bring on a war of depreciation, then so be it.
Thank you @Schnitte for your time spent writing such a detailed answer. I only hopefully vaguely grasp the floating example, but I’m glad my case at least closely resembles the pegged one. Reading both instances, I noticed 2 things that I must seek answer:
1st is the notion that if you hold A’s currency, then you have a “claim” on A’s economy, and that amount is A’s liability. Since it seems money isn’t backed by gold anymore, is that claim only based on belief? Or, if belief is non-existent, then “Hey, look at my bombs & tanks, aren’t they magnificent?” kind of assurance?
2nd is that, since it looks like all money & bonds are debt, the only way for a country to repay its debt is through goods & service, right? In other words, you can only truly settle debts through surplus in export.
May I clarify, is the “public” in their report US population or the whole world in general?
Genuine data sources like yours are appreciated! Please enlighten me (us?) with more explanations when you got more. OTOH, the YT vid provide graphicalization of difficult data with an addition of time dimension, so it’s much easier for beginners. What I want with the OP is to make sense of this whole mess regarding debt, and thereby see the trending bigger picture. Which IMO makes understanding of salient country’s cases important.
The public is everyone outside of the federal government. Social security also owns government debt for example and this measure doesn’t count that. So yes, that includes foreign governments and foreign investors.
The You-tube vid was dramatic but if the US rocketed to the top in 1997 because their data series started at that point, it would be highly misleading. The go-to source for External Debt data is the Joint External Debt Hub of the BIS, IMF, OECD, and World Bank. Clicking through, the US time series does indeed start in 1998. So that aspect of the You tube vid at 3:10 could be an artifact of the data: it’s not real and implies sloppy presentation.That said, there are probably other estimates of US external debt before 1998 that I am not aware of. So I can’t be 100% sure.
Yes, money is a liability of someone owed to someone. Commercial bank money, i.e. the balance in your bank account, is a liability of the bank that the account is held with towards the account holder. Central bank money (cash or balances in accounts held with the central bank) is a liability of the central bank. The peculiarity of it is that it is only payable in other forms of central bank money, not in some sort of asset backing it, but it is still a liability and appears as such on the balance sheet of the central bank.
This character of money as a liability is also the reason why banks can create it at will - they merely create an entry for a liability in their ledgers. Well, commercial banks cannot create it freely at will because they need to meet this liability, if payment is claimed, in the form of central bank money, so they need to maintain a reserve of central bank money to remain able to pay; but this reserve is far less than 100% of the deposits that constitute their liability.
That begs the question, why does CCB want to preserve ex-rate at one particular ratio (and who determines the optimal ratio that CCB wants to maintain)? The rationale here is that the more you depreciate your money, the better export & stuff. So there’s no objection to you creating more & more money. If everyone joins the race and bring on a war of depreciation, then so be it.
It’s a highly political question, but yes, in essence the motivation for the Chinese government and central bank to prevent the renminbi from appreciating is to make exports cheaper. The downside is that it makes imports more expensive and tends to fuel inflation domestically, but apparently this is a price the Chinese government is willing to pay. Such policies (depreciating your currency in order to promote exports) are known as “beggar thy neighbour” in economics, and if others try to do it too, you can have a depreciation war of the sort that was going on in the 1930s.
1st is the notion that if you hold A’s currency, then you have a “claim” on A’s economy, and that amount is A’s liability. Since it seems money isn’t backed by gold anymore, is that claim only based on belief? Or, if belief is non-existent, then “Hey, look at my bombs & tanks, aren’t they magnificent?” kind of assurance?
It’s based on the belief, or confidence if you will, that the currency you hold will be able to still buy you goods and services in the future. This belief is not entirely certain; there is, in principle, nothing that ensures that the Fed wouldn’t flood forex markets with trillions of newly created dollars tomorrow, thereby making dollar balances worthless. But people have sufficient confidence that the Fed won’t do this. In recent decades, many central banks have communicated explicit inflation targets to make it clear to everyone what kind of depreciation to expect.
2nd is that, since it looks like all money & bonds are debt, the only way for a country to repay its debt is through goods & service, right? In other words, you can only truly settle debts through surplus in export.
You could also sell assets. If a country runs a persistent trade deficit, other countries can use their holdings of that country’s currency to buy assets, such as land or company shares, in that country. Essentially, from a macroeconomic perspective the debtor country would be paying off its deficit by selling off parts of its economy.
Exports (goods), yes. Or services, like tourism, banking or insurance, for instance.
Or war. Countries have tried to invade other countries to steal their assets and cancel their debts. It has been argued that this was one of the reasons Germany started WWII: to get rid of the obligations stemming from war reparations as they were laid out in the treaty of Versailles. I believe the consensus among historians is that this did not work, but this has not kept others from trying too.
Well yeah, of course. If you have a $100 bill in your pocket, that’s a claim on US future production (what other people produce). Presumably you owe taxes to the government every year. That’s a claim on your personal production. When you give the government your $100, you agree that nobody owes you $100 of goods and services, and the government agrees that you no longer owe them $100 in tax.
It works because they’re both claims on economic production, and that’s also the reason that the dollar has value, because a state actor with the power to tax will accept that instrument to settle taxes. That’s why the crypto bros are so keen to have the US government accept crypto-coins such as Bitcoin for tax payments. When the government accepts your money for taxes, that money now has value that can be realized, and there are a lot of tech bros who would like to settle their sizeable tax burden with the sizeable hoards of un-realized crypto wealth that they’re stting on .
Oh, I see now! So the US was likely on top of the chart all this time, invisibly. OK, 1/9 dramatic moments solved. If only we had more Swede / Greek / Jap / German / French / Hollanders… on the forum
2 observations:
Creating a liability is not tempting per se, but banks still do it because then they can lend that magic money out for profit, right? So the more the merrier.
Even in case of a withdrawal rush, central bank will not let a combank collapse by pumping some newly created CB money into combank. Thus the reserve ratio of 2%, 3% or 5% doesn’t matter anymore, right?
If a country has bigger ex than im, then upside is stronger. But things lead back to my previous question: why does CCB want to preserve ex-rate at one particular ratio (and who determines the optimal ratio that CCB wants to maintain)?
Why is inflation even necessary? Is it because new money need to be created to ‘account for’ the new goods & service produced in a year? Or it is the new money that stipulates the creation of new goods & ser??..
I think it could be more accurate as a claim on US gov only. Then gov tries to satisfy the claims by collecting taxes. Relevant question: other than taxes, are there other (domestic) methods for gov to increase its… revenue?
From @Pardel-Lux 's and some other answers, it seems a big army is a natural consequence of this money system. It ‘projects’ economic power and thus increase your econ confidence in both local and foreign populations. If you hold debts over some countries and they’re obstinate, you can use the threat of force to persuade them sell out part of their economy. If you’re in debt, you can use the military to annex some neighbor’s assets. If you default and others want to liquidate their holdings, you can just tell them “Oh you want a piece of me? Come take it!”. The result? Arms race.
Is it an exaggeration to consider this post-gold era money to be backed by armament?
Interesting. At this point, I want to consider the pros & cons of bitcoin vs conventional money. From my understanding:
Bitcoin: backed by nothing; no chance of inflation
Money: backed by weapon arsenal; big chance of significant inflation
Is that lacking something important?
Also, 2 new questions:
If bonds & money are all essentially debts, why issue bonds? What are the differences b/w them?
If money’s connection with gold was severed (in '33? or '71?), why did countries move their gold to US? And for what purpose is US holding huge amounts of gold now?
