More on “national debt”

With reference to my “What does ‘national debt’ mean?” (yesterday), Atanu Dey goes on to ask: “Can we talk about national debt without reference to currencies?”

My reply is, not really. So long as currencies are supposed to have value, just like any other asset, then national debt is the same as governmental debt because it is the government of a country that decides on the value of its currency. National debt therefore consists of a shortage of currency — domestic and/or international — held by a country’s central bank during any one period. How long the period lasts before the debt is considered to be serious — several years or several decades, perhaps — depends on the business reputation of the country and the consequent patience of the creditors.

Atanu further asks: “Still, I find the whole notion of debt related to aggregates rather confusing. If A owes $10 to B, then the national debt of the micro-nation consisting of A and B is how much?”

But you can’t arbitrarily make a “micro-nation” of A and B without joining them under one government. The debt then becomes a national debt, due solely in this case by the nation being divided totally between a domestic creditor and a domestic debtor. That is, the country can’t last for long with such a complete breakdown in its economy.

2 thoughts on “More on “national debt”

  1. Thanks for addressing my question, Keith.

    Regarding a micro-economy of only two, A and B. It’s a model. The model abstracts away all the irrelevant particulars and just focuses on just those bits that are relevant.

    A owes B $100. Questions of why this economy has only 2 people, who grows food, who does the policing, where do they live, how will they have children if both are the same sex, how can an entire economy exist with only two people, etc etc, are not relevant here. The only point is to illustrate the idea of debt accounting.

    In this economy, the aggregate debt is clearly zero because for every $ borrowed, there’s a $ lent. In a similar sense, the aggregate debt of the whole world has to be zero, although specific arbitrary groupings of people in the world will have non-zero debts.

    1. Atanu — I take your point, but your model is of an enclosed national economy where a zero sum game is obvious. My original definition applied to an open economy where the world aggregates of loans and debts — which should ‘obviously’ be zero — turn out not to be in practice. Debts far exceed loans because they’re not being paid off and have been added to. Another consequence of this lop-sidedness is that China, for example, has been able to save huge amounts of money every year and invest in American debt.

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