The National Debt 101

Who is the Debtor, Who is the Creditor

The concept of public debt and debt ratios are on the agenda almost once or several times a week in every economic media. I frequently come across news or comments on this subject. I realized that there is a subject that no one focuses on but is the basis of the matter.

Whose debt is the public debt, who is the creditor, who is the debtor, and to whom is it paid? I have not come across a study that examines these. For this reason, I wanted to collect the basics of the subject in a single article with short notes and some studies.

The state's debt is the debt of the taxpayers of that country, true. The interest on the public debt is also paid with the tax collected from the taxpayers, which is also true. So who are the taxpayers, that is, the ones who will pay the debt?

Speaking of developed countries, the vast majority of the taxes are paid by the wealthy part of the society. In other words, the ones who will pay the majority of the debt are the wealthy part, which is the minority. So who is the creditor of the debt?

Whether it is a developed country or not, the vast majority of the creditors of the public debt are again the wealthy part.

In other words, the minority who will pay the majority of the debt is the rich, and the minority who will collect the debt with interest is the rich.

Repayment of Debt

It is unheard of in practice, but let's assume it happens and imagine that a country pays off all its public debt. This is literally taking from the poor and giving to the rich! For this reason, governments are never willing to do this.

Public debt (I am talking about domestic debt) is not paid back. Or rather, it is not paid off. In a country with increasing inflation and national income, if the debt does not increase at the same rate or remains constant, the ratio of debt to national income will have decreased. Thus, the state will have reduced its debt without making any payments.

The study showing the US debt between 1970-2023 is as follows;

The graph of net national income between 1970-2021 in the world economy led by the US is as follows;

As you will see, the net income of nations tends to increase. Therefore, the debt of nations is not a fatal mistake as it is thought.

Transfer of Debt/Interest to Future Generations

There is also the issue of transferring public debt to future generations.

The general view is that as nations become indebted, new generations will start their lives as debtors. This issue should be evaluated separately as domestic debt and foreign debt.

If we talk about domestic debt, the idea that future generations will be indebted is wrong. The truth is the opposite. Think about it this way;

Each generation can consume what it produces. Who is the debtor? Taxpayers / citizens. Who is the creditor? Taxpayers / citizens. If there is a debt / credit relationship, it means that taxpayers are transferring resources to the next generations of those who previously lent to the state. The generation that pays the interest with their taxes receives the interest paid by the previous generation.

The issue is different for foreign debt. This situation falls under the transfer of resources.

In short, public debt alone will not sink a country and there is no such thing as intergenerational debt transfer!