National Debt

 Every country on earth is in debt. The total is over a hundred trillion dollars. Nobody can clearly say who it's owed to. This is the shortest chapter in the book because once you see the shape of it, there's not much more to say 

Transcript

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National debt Now I'm deliberately going to keep this chapter short because honestly, there is very little point delving into the specific details of national debt. It is what it is. The numbers are so large, they've become abstract. The mechanisms are deliberately opaque. And the deeper you dig, the more you realise that the system was designed to be difficult to understand on purpose. So I'm going to lay out what I've found as simply as I can and leave it there for everyone to make their own minds up and do any additional digging they like. The UK national debt currently stands at around£2.9 trillion. That's 97.7% of GDP, meaning the country owes almost as much as it produces in an entire year. The interest payments alone are between£111 and£126 billion a year. To put that in context, the entire NHS budget is around£180 billion. So roughly two-thirds of what we spend on keeping every person in this country alive and healthy is being spent just on servicing the interest on money we've already borrowed, not paying it back, just paying for the privilege of owing it. The United States owes$39 trillion. Japan owes 234% of its entire GDP. Global public debt, the total owed by every government on earth combined, has now exceeded$100 trillion. So here's the question that nobody seems to want to answer clearly. Who do we owe it to? When a government spends more than it collects in tax, it runs a deficit. To cover that deficit, it borrows money by selling bonds, which in Britain are called GILTs. These are essentially I owe us. You give the government money now, the government promises to pay you back later with interest. Simple enough, but who's buying? In the UK, about a third of the debt is owed to ourselves. Roughly a quarter sits with the Bank of England through a process called quantitative easing, which is a polite way of saying the central bank created money and used it to buy the government's own debt, and around£172 billion is held by national savings and investment. So a chunk of it is the government owing money to itself, which already sounds a bit odd when you say it out loud. The remaining two-thirds is where it gets murky. Pension funds, investment funds, banks, insurance companies, foreign investors, they all hold guilts. Around 30% of UK government debt is held overseas. But when the London Economic filed a Freedom of Information request asking the UK Debt Management Office to name the specific companies and entities that hold our national debt, the response was remarkable. They said it can be difficult to identify the legal holders themselves, as GILTs are often purchased through a subsidiary account of a larger entity. They went on to explain that the registered legal holder may not even be the underlying beneficiary, and that the beneficiary may be based in a different country to the registered holder. In other words, we owe£2.9 trillion and we're not entirely sure who to. What we do know is that the usual names appear. BlackRock, Fidelity, State Street, the same institutions that keep showing up in every chapter of this book, all openly advertise their investments in UK government debt. Belgium holds£197 billion worth of British Gilts, which sounds bizarre until you learn that Brussels is home to the clearing houses that act as intermediaries for international bond trades, so the real owners could be anywhere. In the US, the picture is slightly clearer but no less absurd. Warren Buffett, through Berkshire Hathaway, is the single largest non-government holder of US Treasury bills at$314 billion. Japan holds$1.2 trillion of American debt. The UK holds$779 billion. China has been gradually selling its US holdings for years. Every country on Earth is in debt. The combined governments of the world owe over$100 trillion. So who does everybody owe? The answer is financial institutions, investment funds, central banks, and other governments who are themselves in debt to the same types of institutions. It's circular. Country A owes money to banks in country B. Country B owes money to funds in country C. Country C owes money to investors in country A. And somewhere in the middle of all of it, interest is being collected by people whose names we're not allowed to know. On money that in some cases was created out of thin air by central banks and lent back to the governments that created them. If you describe this system to someone who'd never heard of it, they'd think you were making it up. And the interest on all of this debt isn't free money floating in space. It comes from taxes, your taxes. Every pound the government spends on debt interest is a pound it can't spend on hospitals, schools, housing, or anything else. When politicians tell you there's no money for public services, but there's always money for debt repayments. Which brings us to where it all started. The City of London, often called the Square Mile, is a 1.12 square mile area in the centre of London that operates as its own entity. It has its own government, the City of London Corporation, which predates Parliament and is the oldest local government in Britain. It has its own Lord Mayor, separate from the Mayor of London. It has its own police force, the City of London Police, separate from the Metropolitan Police. It has its own flag, its own coat of arms, and its own set of ancient rights guaranteed in Magna Carta, Clause 9, which remains in statute to this day. When the monarch enters the City of London, they are traditionally met at the boundary by the Lord Mayor in a ceremony that acknowledges the city's historic autonomy. Only 8,600 people live there, but 678,000 work there every day. And unlike any other local authority in Britain, businesses in the City of London get to vote in its elections, not just residents. The financial institutions don't just work in the square mile, they help govern it. The City of London also has an official called the Remembrancer, an ancient post whose role is to sit in Parliament and monitor any legislation that might affect the city's interests. So think about that for one second. The financial district of London has its own representative embedded inside Parliament, watching every piece of law that passes through to make sure it doesn't inconvenience the people who run the money. And here's the connection that ties it all together. National debt as we know it began in the 1690s when William III needed money to fight a war against France. He turned to a syndicate of City of London merchants and asked them to raise the funds. They did, and in return they were granted a royal charter. That syndicate became the Bank of England. The institution that manages the country's money supply, sets interest rates, and holds a quarter of the national debt was born out of a deal between the Crown and a group of private financiers in the Square Mile. The guilts are traded there. The institutions that own the debt are headquartered there. The remembrancer watches Parliament from there, and the whole arrangement has been running in one form or another for over 300 years. I said I'd keep this short and I will. I'm not going to pretend I fully understand every mechanism of how national debt works because I don't think anyone outside of a fairly small circle truly does, and I suspect that's by design. But what I can see clearly enough is the shape of the thing. Governments borrow money from financial institutions, pay those institutions interest out of public taxes, cut public services when the interest bill gets too high, and the people who lend the money get to sit in the room where the rules are written. If that sounds like the same pattern we've seen in every other chapter of this book, that's because it is.