In response to my posting, “Leave the world economy alone!” (1 June), Atanu Dey wrote the following: “Keith, I have never understood what “national debt” means. Would you care to write a short explanatory post on what it is. I know what debt means when it comes to an individual. I owe someone $100. But when someone says “national debt”, I am not sure who owes whom. Thanks.”
As I see it, a “national debt” occurs when one country cannot supply enough of a currency — in quantity and specificacy (a tradable currency) — to satisfy a foreign creditor. The debt may be incurred by the government as a state to state loan or it may be a trade debt of one of its domestic businesses or a collection of them. If creditors are unwilling to accept a discount on the debts — or ‘take a haircut’ — then the country effectively becomes a pariah state which cannot trade and its economy immediately deteriorates .
If a country can subsequently show that it seriously intends to reform its expenditures — often after the government has been overthrown — then some other providor, such as the IMF — will risk a further loan to give it the running liquidity it will need.