The Crash Course - Chris Martenson [36]
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 recipients would be available. We might consider such actions to be a moral default on the part of Congress, but they would not be a legal default.
With regard to the nation’s debts, however, Congress could not pass an act which would reduce the principal repayment of Treasury bonds without triggering a legal default. Once a default happens, all sorts of legal machinery kicks into high gear. That’s the difference between a debt and a liability: Debts are legal obligations, while liabilities are, at best, moral obligations.
There are only two ways to settle a debt: pay it off or default on it. Until one of those two things happen, the debt remains “on the books.” Sometimes you’ll hear of debts being “restructured,” as with Greece in 2010, but that’s just a fancy way of saying that the debt has either been delayed (i.e., had its payment schedule extended) or reduced in some way, which constitutes a partial default, but a default nonetheless. In this regard, debts are simple beasts—they can either be paid off, or they can be defaulted upon. Those are the only two options for making them go away.
However, if you happen to have a printing press, as many governments do, there’s an alternative way to “pay off” a debt—simply print up the money to pay it off. Because such printing seems to work for a while and offers the least amount of immediate political pain, it has been a very common feature of economic history. A long time ago this involved