The Crash Course: The Unsustainable Future of Our Economy, Energy, and Environment by Chris Martenson Page B
Authors: Chris Martenson
Tags: United States, General, Economics, Business & Economics, Economic Conditions, Forecasting, Economic forecasting - United States, Economic forecasting, Development, Sustainable Development, Economic Development, Sustainable Development - United States, United States - Economic Conditions - 2009
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present. It is a dangerous wager, and one which, if it doesn’t pan out, places the collective wealth of entire nations at risk.
When debt markets have been disappointed in the past, standards of living have suffered, governments have been tossed, currencies have been destroyed, and/or countries have fallen. We therefore care very deeply about whether our debt markets are at risk of being disappointed, and, if so, what the source of their disappointment might be.
What Is Debt?
In Chapter 7 ( Our Money System ), we learned that all money is loaned into existence. The other side of the loaned money is the loan itself. We now need to spend some time looking at the nature and quantity of those “loans,” which are also sometimes referred to as “credit” or “debt.” All three terms are interchangeable, and sometimes we’ll switch back and forth between them to follow established conventions. For example, government debt and some consumer loans trade on and are part of the credit markets. To really mix it all together, we’ll examine a data series called “total credit market debt.” If at any time you find the use of a term confusing, feel free to mentally insert whichever word you prefer—loan, credit, or debt—they’re essentially the same thing, and their minor differences aren’t relevant to our discussion.
So what exactly is a “debt” (or “loan”)? A debt is simply a legally binding, contractual financial obligation to repay a specific amount of borrowed money, at some point in the future, at a defined rate of interest—in other words, an IOU. An example would be an auto loan of $10,000 at an 8.75 percent rate of interest.
An auto loan is a debt, a credit card balance is debt, and mortgages, Treasury bonds, home equity loans, corporate bonds, and municipal bonds are all examples of debts. In every case there is a piece of paper (or its electronic equivalent) that identifies an amount borrowed, a maturity date, and a rate of interest.
Auto loans and mortgage debt are known as “secured” because there is a recoverable asset attached to those kinds of debts. Credit card debt is known as “unsecured” because no specific asset can be directly seized in the event of a default, although other remedies exist.
Because a debt is a legal obligation, if repayment fails to happen on schedule, all sorts of prescribed legal remedies exist for the lender to pursue, ranging from asset seizure, to liens, to legal judgments.
Debts are distinct from liabilities , and it’s important to remain acutely aware of the difference between them. A liability is a form of financial obligation, but it’s not the same thing as a debt. Someone who has a young child may think of their potential future college expenditure for that child as a liability, but it’s not a legally binding obligation, and therefore it’s not a debt. Debts represent known quantities and fixed amounts, whereas liabilities are imprecise and prone to fluctuations. Many things can change between today’s perceived liability and the actual future payout. The child in question may decide not to go to college after all, allowing the parent to evade the entire amount, or he or she may decide to go to the most expensive college in the country, drastically boosting the final cost of the liability. However, if the parent decides not to pay for college, no legal remedy exists for the child, because the obligation wasn’t a debt.
At the national level, the entitlement programs in the United States (e.g., Social Security, Medicare/Medicaid, and so on) are liabilities of the U.S. government. Though they may be vast, huge, enormous liabilities, they aren’t debts. At any point along the way, the U.S. government could, by way of an act of Congress, completely change the terms of the obligation, perhaps by raising the retirement age to 100 or slashing benefits by 80 percent, and no legal remedy for any of the affected
When debt markets have been disappointed in the past, standards of living have suffered, governments have been tossed, currencies have been destroyed, and/or countries have fallen. We therefore care very deeply about whether our debt markets are at risk of being disappointed, and, if so, what the source of their disappointment might be.
What Is Debt?
In Chapter 7 ( Our Money System ), we learned that all money is loaned into existence. The other side of the loaned money is the loan itself. We now need to spend some time looking at the nature and quantity of those “loans,” which are also sometimes referred to as “credit” or “debt.” All three terms are interchangeable, and sometimes we’ll switch back and forth between them to follow established conventions. For example, government debt and some consumer loans trade on and are part of the credit markets. To really mix it all together, we’ll examine a data series called “total credit market debt.” If at any time you find the use of a term confusing, feel free to mentally insert whichever word you prefer—loan, credit, or debt—they’re essentially the same thing, and their minor differences aren’t relevant to our discussion.
So what exactly is a “debt” (or “loan”)? A debt is simply a legally binding, contractual financial obligation to repay a specific amount of borrowed money, at some point in the future, at a defined rate of interest—in other words, an IOU. An example would be an auto loan of $10,000 at an 8.75 percent rate of interest.
An auto loan is a debt, a credit card balance is debt, and mortgages, Treasury bonds, home equity loans, corporate bonds, and municipal bonds are all examples of debts. In every case there is a piece of paper (or its electronic equivalent) that identifies an amount borrowed, a maturity date, and a rate of interest.
Auto loans and mortgage debt are known as “secured” because there is a recoverable asset attached to those kinds of debts. Credit card debt is known as “unsecured” because no specific asset can be directly seized in the event of a default, although other remedies exist.
Because a debt is a legal obligation, if repayment fails to happen on schedule, all sorts of prescribed legal remedies exist for the lender to pursue, ranging from asset seizure, to liens, to legal judgments.
Debts are distinct from liabilities , and it’s important to remain acutely aware of the difference between them. A liability is a form of financial obligation, but it’s not the same thing as a debt. Someone who has a young child may think of their potential future college expenditure for that child as a liability, but it’s not a legally binding obligation, and therefore it’s not a debt. Debts represent known quantities and fixed amounts, whereas liabilities are imprecise and prone to fluctuations. Many things can change between today’s perceived liability and the actual future payout. The child in question may decide not to go to college after all, allowing the parent to evade the entire amount, or he or she may decide to go to the most expensive college in the country, drastically boosting the final cost of the liability. However, if the parent decides not to pay for college, no legal remedy exists for the child, because the obligation wasn’t a debt.
At the national level, the entitlement programs in the United States (e.g., Social Security, Medicare/Medicaid, and so on) are liabilities of the U.S. government. Though they may be vast, huge, enormous liabilities, they aren’t debts. At any point along the way, the U.S. government could, by way of an act of Congress, completely change the terms of the obligation, perhaps by raising the retirement age to 100 or slashing benefits by 80 percent, and no legal remedy for any of the affected
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