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> whenever I hear that all countries are in debt I think of the law of conservation of mass and have an obvious question: who is this monumental, multiple-GDP debt owed to?

Finally, someone asking the right questions!

The first observation is that if you try to tally "global debt" vs "global assets", a lot of it appears to be missing. This is because the ownership is obscured in tax havens. There's an excellent paper on this: https://gabriel-zucman.eu/files/Zucman2013QJE.pdf

The second observation is that the 2008 financial crisis put a lot of previously high quality government bonds in jeopardy, and we saw who the major bondholders were: banks. Banks are effectively required to hold bonds as "safe" assets to cover their liabilities.

> why are they lending? It looks like either there are people with resources they have no idea how to invest in something actually productive

This seems to be basically true, and is why there is so much SV money sloshing around. There's lots of investment that would be societally useful but the returns would not flow back to the original investor, so either it doesn't happen or elaborate schemes need to be constructed to bribe them with future taxpayer cashflow in order to make this investment.

> insufficient taxation of the proverbial "top 1%"?

Some of whom own more than the GDP of some small countries. And a few who have stolen a good fraction of the GDP of small countries.

> The first observation is that if you try to tally "global debt" vs "global assets", a lot of it appears to be missing.

Part of that comes through debt funding of future liabilities.

For example, if you invest $1M into a number of small businesses, those businesses make and spend money, buy and sell goods, hire people, and pay taxes in a variety of ways. Hopefully, they're a net positive in a variety of ways.

If you invest $1M into a bridge, there's no additional tax revenue, a brief burst of construction jobs, it will need maintenance, improvements, etc long term. You've created a net liability.

Therefore, many "global assets" simply disappear as time goes on while the debt/liabilities grow. This is why more and more cities are pulling in their borders (aka responsibilities) to let unsustainable streets crumble, water infrastructure collapse, and police/fire coverage dwindle. It's awful if you're in one of those de-annexed areas.

That's not at all what I mean: I mean the accounting entries for debt and assets.

If a bank lends a bridge-building company $1m, that produces a $1m liability for Bridge LLC and a $1m asset for Bank. (In fact slightly more, due to interest). When Bridge LLC spends money on concrete, its free cash goes down and its asset value labelled "bridge" goes up.

In the worst case, Bridge LLC spends the money to no effect and goes bankrupt - leaving Bank to take a writedown on the "asset" side of the loan. But until it does that the loan still exists as two sides held by the two companies which should have the same value.

The "missing" money is money owed where it is not clear from the outside statistical reporting where it is owed to - and in a global sense, the ledger must balance unless we owe money to aliens.

The PDF explains the methodology.

(An unsafe bridge may be a "liability" in the legal sense, but in any accounting sense it's an asset. Maybe subject to depreciation. But unless it's something that you owe to someone else, it's not an accounting liability.)

The ledger does not have to balance. If the probability of you repaying me is reduced I have no choice under accounting standards but to mark down the value of the loan on my books. You still owe me the money, but the asset on my balance sheet is a function of likelihood you'll go bankrupt.

>If you invest $1M into a bridge, there's no additional tax revenue, a brief burst of construction jobs, it will need maintenance, improvements, etc long term. You've created a net liability.

Not entirely true. If the net effect of the bridge is to connect two communities together more effectively then there may be people who pay property tax that buy land near the bridge, and then grocery stores, restaurants, barber shops, service stations and the like that spring up to serve those people.

A bridge, constructed in the correct location, can easily spur economic growth which can pay back both the initial cost for the bridge and provide enough tax revenue to pay for its upkeep.

The problem arises when you assume that the debt of a country in its own money is the same that private debts.

When a private bank credit some household or business they get an asset (the debt owned to them) and a liability (the money they just created from nothing) that cancel each other. The entity receiving the credit have the same position but inverted. So, if you take all the economy, everything cancels to zero and not "law of conservation of mass" has been violated.

The debt issue by a country is a very different animal. In fact, probably we should stop calling it debt. When a government issue debt they are creating financial assets that allows the private sector to operate. An interesting mental experiment is to think in what would happen if all the governments pay all the 'debt' and stop spending.

Stephanie Kelton write about those things:

"Our challenge is not whether we can “afford” to make the payments we have promised to seniors, veterans, the disabled, government contractors, healthcare providers, bondholders, etc. (today, tomorrow and into the indefinite future) but whether we will be a productive enough nation to allow the government to make good on those promises without causing an inflation problem. That is the debate we should be having."

http://www.nakedcapitalism.com/2013/10/stephanie-kelton-how-...

In the UK the political parties are wed to a lock on pensions that keeps them tracking inflation. One of the parties tried to wiggle out of a small part of it in the recent election and it seems that was at least partly responsible for their poor election performance. It will be interesting to see how this plays out over time and whether at some point the dam will break and chaos will ensue.

At an individual level it's probably a good idea not to rely on the state for anything if you can manage that.

The point is that, the government, can always pay future pensions because it can issue money.

The question is: can do it without generating inflation?

It depends of the productivity of the economy in that future.

The conclusion is that saving money means nothing, what is really important is generate real wealth now so we can pay in the future without generating inflation.

So, investment in real capacity (creating infrastructure and knowledge) now will allow generate the real resources for "paying" in the future. Just the opposite of what they try to sell us.

Never mind how much money you save now if, in the future, there are not real resources for taking care of everybody.

In theory, you're right, but the way we measure things now basically prohibits that. Let's say we made sure, today, that "investment" were high so that it can produce the "output" that pensioners can consume. What would that look like, when it all plays out?

"You were promised $600/month. Obviously, we can't do that because that would require taxing 70% of labor income, which is way past the Laffer point. We're paying you $400/month instead. But it's okay, because we made productivity enhancements that let the same money go further. For example, the food tastes 50% better, so it's all a wash. Plus, you can move ten miles out to a cheaper apartment because construction and transportation are better now."

Strawman? A Federal Reserve banker tried basically the same thing to trivialize the inflation experienced by typical people: http://www.reuters.com/article/us-usa-fed-dudley-ipad-idUSTR...

if the government expend money in the economy beyond real available capacity (all else unchanged) we will see inflation.

If the government increase taxes in the economy in absence of inflation (all else unchanged), there is going to be a deflationary trend.

All the point of the argument is that if we have real available capacity in the economy you can spend, 600$ or whatever have been promised, and, if we don't have real resources available, we can't spend anything, never mind what have been promised.

It have nothing to do with how much money we have saved or how big is the deficit, but with the real resources available at the moment of paying.

>It have nothing to do with how much money we have saved or how big is the deficit, but with the real resources available at the moment of paying.

My point is that the obligation is phrased as "$600 + inflation index", not "the amount of utility you could have got for $600 at the time we made the promise". Improved productivity can help you meet the latter, not the former. The latter is a more reasonable promise, but the former is what was actually promised.

>All the point of the argument is that if we have real available capacity in the economy you can spend, 600$ or whatever have been promised,

It's not true that "if the real productive capacity is there, then taxing out the money for the pensions is no problem". The evasion behavior is non-linear and there's a cap to how much you can collect with taxes before e.g. pushing economic activity underground and into other countries. (Hence the Laffer curve point.)

> An interesting mental experiment is to think in what would happen if all the governments pay all the 'debt' and stop spending.

I suppose they would have to explicitly collect taxes to cover their current spending, not make bets on the future of economy. Isn't it how our civilization worked for a long time?

> Our challenge is not whether we can “afford” to make the payments we have promised to seniors, veterans, the disabled, government contractors, healthcare providers, bondholders, etc. (today, tomorrow and into the indefinite future) but whether we will be a productive enough nation to allow the government to make good on those promises without causing an inflation problem.

I don't really see the difference. If we are productive, the government can compel citizens one way or another to deliver on those promises. If we aren't, it can't and it needs to reduce them - either explicitly or implicitly by devaluing the money they are denominated in or any other creative way it could come up with. So sure, whether the government can afford future spending is the same thing as whether the economy will be big enough to tax it with fulfilling these promises. I think.

OK, so somehow I got back to making bets on future economy. But this time it appears to be a bet made to justify future spending, not current spending, so unavoidable.

"I suppose they would have to explicitly collect taxes to cover their current spending, not make bets on the future of economy. Isn't it how our civilization worked for a long time?"

So, If the government have pay all its debt and it's not spending anymore, where the money that is collecting as taxes come from?

" don't really see the difference. If we are productive, we can compel citizens one way or another to deliver on those promises. If we aren't, we can't and we have to reduce them - either explicitly or implicitly by devaluing the money they are denominated in."

The difference is what we should be doing now. Should we be reducing the deficit because we will "run out" or money?

or should we try to increase the future productivity creating infrastructure and knowledge?

What of the two options will make it possible to pay in the future?

"OK, so somehow I got back to making bets on future economy. But this time it appears to be a bet made to justify future spending, not current spending, so unavoidable."

I'm talking about investing in the sense of creating real assets. A bet and an investment are not the same thing, even if it is true that many 'investors' nowadays think that it is.

You added content to your post after I answered you, by the way. It's better if you answer in another post.

Part of "current spending" _is_ making bets on the future state of the economy. Governments build roads, dig ports, build new neighborhoods, etc. in anticipation of economic and/or population growth.

When a company lends money to do such that, it is called leverage, and considered a good thing because it allows them to make higher yields on their capital. Shouldn't governments be judged the same if they borrow money to speed up such developments?

> When a government issue debt they are creating financial assets that allows the private sector to operate. An interesting mental experiment is to think in what would happen if all the governments pay all the 'debt' and stop spending.

There's a great Planet Money about this, and what happened when the US paid off its debt in 1835:

http://www.npr.org/sections/money/2012/08/07/158376579/episo...

So I listened to this again and I feel compelled to update that it's merely a good Planet Money, not a great one. Not as much detail about the issue as I'd remembered.

who is this monumental, multiple-GDP debt owed to?

To our future selves. Why are pensions failing? Because in the past people moved the money from the future into the present (i.e. the past), and now we are in the future (i.e. the present) the money isn't there. Where is it? It was spent on crap rather than invested in assets. Oops.

> Where is it? It was spent on crap rather than invested in assets.

What makes something crap rather than an asset? How could they have done it "the right way"?

Governments spend a lot of this money on job creation. So the question is, what are those jobs? Are they creating value-adding infrastructure such as bridges and tunnels that accelerate movement between commercial centres? Or are they doing the equivalent of paying people to dig holes and fill them in again, such as employing huge bureaucracies to shuffle paper around and sit in meetings eating biscuits?

Another example is a person who borrows money and spends it on home improvements. He or she still has to pay back the money and the interest, but if the value of the improvements is greater than the cost, that money can be recovered later by selling the house. Or that person could have spent the money on... nothing. That might have been fun, but it still needs to be paid back...

A household an a government are very different things.

A government that issue its own currency is not limited in the same way that a household.

A government, that issue its own currency, could spend (constrained by the real resources available) without creating debt at the same time.

It's true that it would be wise to spend in creating more real capacity in the economy, instead of digging holes and fill them again.

Printing money inexorably leads to inflation. So the money might be there "on paper" but worth less (or even worthless). The net result is the same - money moved from the future into the present, then the same rules on how to spend or invest it apply.

"Printing money inexorably leads to inflation"

That's not true. Inflation could be though as a ratio between the money in circulation and the productivity in the economy. If you increase both, numerator and denominator you don't get inflation.

Also, "printing money" doesn't create inflation. Spending it when there is not enough available resources can create inflation.

If you have doubts, check the QE programs of the FED and the ECB (ongoing).

In fact, the more famous episodes of hyperinflation are originated because a collapse in the productive economy (the denominator), and not because an increase in money (the numerator).

If real resources are increased, a 'space' is generated for spending, and it would be a real pity if that opportunity is wasted.

Sure, I should have been more precise. If the productivity in the real economy is growing then of course the money supply should increase to maintain the parity. But the context here is that holes in the budget don't matter because you can just print money to pay them off - yes technically you can, but not without consequences that may be worse than just biting the bullet!

The "money" is always there. http://www.nakedcapitalism.com/2013/10/stephanie-kelton-how-...

"Who is this monumental, multiple-GDP debt owed to?"

Government bonds can be popular parts of the investment mix of private pension funds because they pay out in the currency that those pension funds will need to pay out pensions. That removes any risk of exchange rate changes (say that you know you will have to pay out a billion euros in pensions in the next five years. A mix of technology shares statistically will do better in the long run, but in such a short timeframe, it could do worse, especially if it pays out in US dollar, which may go up or down relative to the euro)

Also, for governments there is a fairly easy way out of last resort: print money. The resulting inflation effectively gives everybody a cut on the government debts they hold, without the government having to negotiate a deal on that cut (that only holds if countries write debts in a currency they control. Debts in euros are somewhat of an exception in this respect, as are the rare country bonds in foreign currencies)

It's banks. Our current capitalism functions on financial credit. Banks are lending all this money they don't have in hope that they'll get it back with interest. Everyone believes in it and I'd say that it's a form of modern ideology.

The function of private banks (apart of managing the system payments) is to arbitrate the creation of money when there is something deserving to invest. That's not a problem, or an ideology, is how the system works.

A different question is if they do a good work.

The situation you're describing is a basic capital glut. There's too much cash floating around looking for something to invest in and make a return, but the pool of current and future aggregate demand has mostly run dry. As a result, society's most high-value projects have become money-losers, and useful stuff (like repairing trains or investigating the natural sciences) stops getting done.

Maybe Broad Institute, Harvard, MIT, shouldn't be tax free "non-profits" while TrainRepair Inc is paying 35% tax rate?

I'd certainly favor taxing the ever-loving heck out of Harvard and MIT (actually, everyone in Kendall and Harvard Squares) to repair the MBTA that literally brings their employees to work.

The debt levels are high enough that tax hikes would have to be very broad to close budget gaps. The top 1% can't make up these shortfalls.

Not advocating it, but what if we just confiscated their total wealth? "Eat the rich" and all that.

Hard to do legally, and if you do it illegally it tends to collapse the rule of law and result in investors fleeing.

Far better would be even small levels of property tax, land value tax, and (important for 21st century) intellectual property tax. IP licensing fees are a key component of how many big businesses shuffle money into low-tax jurisdictions.

Oh, and kill the tax secrecy havens. This is already starting to happen, but it's a very long slow process.

Unrest do collapse the rule of law for a shot time, but there is a problem. If investors start to flee then they stop being the top 1% earners in that place. Sooner or later the allure to earn money overrides the fear of loosing, and the cycle continues.

In a book called Debt, the First 5000 years they explore this concept and uses it to explain why nations tend to independently concludes that you must have laws that regulate lending. If not you get periodical unrest where the populace go and burn down the debt ledges, and in some historical places this happened as often as once every few years. Collapse of the law don't permanently scare away investors.

Not to say that unrest and collapsing the rule of law is a good thing.

In the Bible I think this was called a "jubilee"; debt was forgiven, slaves (some) freed every 20 years. I guess that in a high mortality society this makes a lot of sense - 90% of human assets will expire in that time period in any case so if you have the bad luck to live for 10+ years in slavery you deserve a break!

Just my opinion but I see this as leading to a depression. Who then manages those resources that were confiscated, many of which are likely the drivers of production (machines, mines, etc.) It would also place an imperative on the most creative to hide any assets they produce leading to a reduction in both the size and number of job producing enterprises.

I am not however, in anyway against a larger tax on the wealthy or at the very least the elimination of tax loop holes.

According to:

http://www.usdebtclock.org/

The US debt is now at roughly 20 * 10^12 USD, while according to:

http://www.economist.com/news/finance-and-economics/21631129...

The top 0.01% hold assets of close to 6 * 10^12 USD (371 * 10^6 * 16 * 10^3). Expand to the top 0.1 % and the number is 11.5 * 10^12 USD. Note that the article is from 2014, at the time the debt was at ~ 19 * 10^12 USD:

https://en.wikipedia.org/wiki/National_debt_of_the_United_St...

So simply taking everything from the top 0.1 % (not the top 1%) would cover roughly half the debt. Seems like an additional 20% taxation might make for reasonable down payment, though.

> Who are these investors and how hard would it be to make them cut their losses?

One of the bigger ones is pension plans for private companies which legally cannot invest in anything sensible. This is why companies are pushing their employees to invest in a 401k: the 401k can invest in something with a nice rate of return.

Making them cut their losses might not be hard though - private pensions are generally believed to be underfunded. It is generally accepted that many companies will cut their pensions anyway when they cannot afford them.

There are lots of other buyers of debt though.

And pension debt depends on how you account for future liability an d guess what Bloomberg etal have a vested interest in making things seem as bad as they can.

you need to ask Cui Bono "Who benefits" when you read articles like this

> no idea how to invest in something actually productive

It is productive, aka it produces a return. If you have another idea of "productive" to a lender, let me know.