When commentators talk about the (Commonwealth) Government debt, they are referring to bonds that have been issued by the Commonwealth Government, via the Treasury department.

While there is no doubt that bonds are a debt of the Commonwealth, what few people realise is that the money used by investors to buy bonds is also a debt of the Commonwealth. When investors buy bonds – which is the othetr side of the transaction in which the Commonwealth sells bonds – those investors are simply swapping one form of Government debt for another.

So, the bond does not create debt for the Government. It simply changes the type of debt the Commonwealth owes. The fact that there is money in existence in the first place is what created debt for the Commonwealth.

As we saw earlier, the Commonwealth creates dollars when it spends. Every one of those dollars is technically a liability – a debt – for the Commonwealth. When the Commonwealth collects a dollar as tax, that debt is cancelled. So, the only way for the Commonwealth to get out of it’s financial indebtedness would be to tax back every dollar that it creates.

Of course, if the Government took out every dollar it had previously created, where would you and I get the dollars we need to buy things from each other? As you saw here, other tha Government spending, the only other way for money to exist is if someone in the private sector borrows it and does not pay it back.

So, all money is a debt owed by someone. If it is created within the private sector, then it is a debt owed by a private person or company. If it is created by the Commonwealth, then it is a debt owed by the Commonwealth.

Now remember, one person’s debt is another person’s asset. So, when a dollar is created in the private sector, someone in that sector has a debt of $1 and someone else in that sector has an asset worth $1. The private sector as a whole is no better or worse off. The private debt balances out the private asset.

But when a dollar is created by the Commonwealth, the Commonwealth has the debt but whoever holds the dollar gets the asset. That ‘whoever’ will usually be someone in the private sector (they could also be a state or a local Government). So, the Commonwealth’s debt is balanced out by the private sector’s asset.

That’s why one way to look at the ‘national debt’ is to understand that it is the same thing as the private sector’s asset.

We see this explicitly when the Commonwealth issues a bond. Everyone can see that the (private sector) company that buys the bond has an asset and that the corresponding debt is owed by the Commonwealth. But no one ever stops to think about the asset/debt situation before the bond is issued. The investor usually buys the bond using reserves held with the Reserve Bank of Australia. These reserves are a liability for the RBA. In turn, the RBA is wholly-owned by the Commonwealth. So, using the basic accounting concept of consolidation, the reserves are a liability for the Commonwealth.

The issue of the bond, then, simply swaps one form of Commonwealth debt (reserves, which are a debt owed by the RBA) for another (bonds, which are a debt owed by the Commonwealth treasury). The issuing of the bond is not new debt. It is simply a different type of debt. Happily, it is a type of debt that lets the private sector hold wealth.

All money issued by the Commonwealth is technically a debt. But, if you and I want to have some money to exchange without one of us going into – and staying – in debt, then we need the Commonwealth to have issued that money.

The ‘national debt’ must be held by someone. That someone is the private sector, which is where we all actually live. The Government’s debt is our savings.