America’s debt
fundamental component: trust of payment. When institutions like pension funds, insurance firms or even sovereign wealth funds want to invest very large sums of money into bonds, just like a bank giving a loan to a person, they want to know that the borrower will not default and they will receive all which is owed. So it is very important that these institutions trust that the American government will be able to pay back the bonds. Currently America has the most safe or trustworthy bonds, so safe that they are considered risk-free by many. This is due to many factors, one of which is that America has never defaulted on a debt or missed a payment. 10 The other components which make up the trust of payment are that the US dollar is the reserve currency of the world: this makes investing in assets like bonds in US dollars much safer as a reserve currency is very stable and extremely liquid. America also has control over their currency, which allows them to affect imports and exports, and in turn demand in the economy and the exchange rate. But they can also print money (quantitative easing), which, although it can have its side effects, like devaluation of the currency and inflation, massively helps them afford the payments. This allows them to not fall into the same situation as Greece, where, because they used the e uro, they couldn’t just print more to pay the debt and therefore defaulted and had to be bailed out by the European Central Bank (ECB) and the International Monetary Fund (IMF). 11 Another reason why people think American debt is safe and will continue to buy the debt is that it is the strongest economy in the world with good growth prospects. There is also the idea that, unlike a person, the US economy ‘never dies’ , which is important as it shows people how they can just roll on the debt for many generations and can therefore afford the payments. As much of their expenditure is on high return infrastructure like schools, hospitals and technology, the government should be able to afford increased debt payments because with a growing economy and population they will gain more tax revenue with each generation. This was especially true between 1946 and 1974 where debt-to-GDP fell from 121% to 32% because the size of the economy grew faster than the debt and so the increased payments weren’t an issue. 12 The large amounts of debt owed by America is less of a problem because most of the debt is owed to America and Americans, with only around 30% of its debt, ($7.3 trillion) being held in other countries, with the top 3 countries being: Japan at $1.1 trillion; China at $870 billion; and the UK at $650 billion. 13 The rest of the debt is owned by American pension funds, mutual funds, the Fed and government accounts. The Fed owns a large proportion of US debt (roughly 20%) to manage its monetary policy like quantitative easing and this makes it less of a problem as all the profits the Fed makes, it gives it to the Treasury which the government can use to fund its expenditures. 10 Cecilia Rouse and others, ‘Life After Default’, The White House, last modified 6 October 2021, https://www.whitehouse.gov/cea/written-materials/2021/10/06/life-after-default/. 11 Elvis Picardo, ‘The Origins of Greece’s Debt Crisis’, Investopedia, last modified 16 March 2022, https://www.investopedia.com/articles/personal-finance/061115/origins-greeces-debt-crisis.asp. 12 Matthew O’Brien, ‘Why the U.S. Government Never, Ever Has to Pay Back All Its Debt’, The Atlantic, Last modified 1 February 2013, www.theatlantic.com%2Fbusiness%2Farchive%2F2013%2F02%2Fwhy-the-us- government-never-ever-has-to-pay-back-all-its-debt%2F272747%2F. 13 Kimberly Amadeo, ‘Who Owns the US National Debt?’, The balance, la st modified 19 January 2023, https://www.thebalancemoney.com/who-owns-the-u-s-national-debt-3306124.
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