Debt Forgiveness And The Current Crisis

[Aaron]

Ok, my understanding of finances beyond my own is nil so forgive me if this sounds fucking retarded.

At various times, governments, the World Bank and the INMF have simply "forgiven" debt. As in the money you still owe no longer has to be repaid, it is as if it never existed. What would happen if the governments of the world just made the current financial debt disappear? Is that even possible?

[SteveK]

I suppose that they can only forgive debt that they themselves have lent. They can't forgive a persons . . . let's say Visa bill . . . because the debt belongs to Visa, not to them.

[Graham Kennedy]

I'm no money expert, but forgiving a debt isn't like the money never existed is it? It's more like I lend you £50, and after you struggle to pay it back for like 20 years I just say "You know what... just forget it. You don't have to pay it back."

I don't really get the idea of government debt. If the government spends more than it takes in in revenue, it owes a debt, right? But... does it actually go and borrow that money off of somebody? And if so... who? The US is a trillion dollars in debt... who can afford to lend them that money? And where did THEY get the money from?

I always had the thought that it was more an accounting thing than an actual debt owed to somebody... like the government just declared that there was a debt there and said "Meh, we'll be sure to make it up at some point." I thought of it as being like how you use imaginary numbers in math, where you can use -1^.5 even though it's not a real number, so long as you cancel it out later on. I figured that the debt is a theoretical debt, and it doesn't matter so long as you eventually balance the books. But if so, well, why not just say "sod it, let's pretend that debt never existed."

[Sionnach Glic]

I think that'd just make everything worse. Think about it.

Who is (for example) the US in debt to? Every other country.
The other countries get paid back slowly with interest, giving them a source of income.
These countries currently have a severe lack of money to spend, and need every source of income they can get.
If the US's debt is cancelled, other countries lose billions, sending them into an even worse state of affairs.
Crisis gets even more crisisier.

Of course, the last time I took a class on economics I was 15, so there's a good chance everything I've just said is BS, but I think it's true.

[Graham Kennedy]

Okay I did some reading, and it seems like government debt really is a debt. Basically what they do is either borrow the money from another country, or from an institution like the World Bank, or they issue government bonds, which are a government IOU. Other countries, major banks and corporations, etc, buy the bonds and that's the money the government uses.

So if the US wants to increase its debt by $100 billion, they issue $100 billion worth of new bonds which the market buys up. Apparently China is a major owner of US debt. Japan also spends a lot of it's big trade surplus buying government bonds.

Loaning to governments is considered to be an exceptionally safe investment, as is buying government bonds, because a government basically can't go bankrupt like a company can; no matter what happens, the government can always raise money from taxes, or even just print more money to pay the bonds off. And they can operate over decades, even centuries. Hence why a government can basically go as far into debt as it wants to. For instance in World War II the UK went massively into debt to the US as part of the lend-lease program. The UK only finished paying that debt off in 2006, more than 60 years later.

So yeah, the US debt is an actual debt that other countries and companies. You can't just wish it away and pretend it doesn't exist any more.

[Sionnach Glic]

Aye, I think that's what I meant.

For example:
Let's say I'm low on money, and ask Graham can I borrow 10,000 euros. He gives me the money (I wish! ), and I do what I want with it, paying it back slowly with interest over the years.

But then one day, for whatever reason, Graham goes into serious financial troubles, and needs money badly. I'm a good source of income for him, because I'm still paying him back the money he gave me. But I can't pay him the whole sum, since I don't have that money either because I'm in a lot of debt as well.

Now, if Graham went up to me and said "well, we're both in financial trouble, so let's just say we don't owe each other anything anymore", do you think that would be good for Graham? No, because he's now lost that 10,000 and I'm no longer providing him wth a source of income.

It's the same with governments, but on a larger scale.

[Aaron]

I'm no money expert, but forgiving a debt isn't like the money never existed is it? It's more like I lend you £50, and after you struggle to pay it back for like 20 years I just say "You know what... just forget it. You don't have to pay it back."

I don't really get the idea of government debt. If the government spends more than it takes in in revenue, it owes a debt, right? But... does it actually go and borrow that money off of somebody? And if so... who? The US is a trillion dollars in debt... who can afford to lend them that money? And where did THEY get the money from?

I always had the thought that it was more an accounting thing than an actual debt owed to somebody... like the government just declared that there was a debt there and said "Meh, we'll be sure to make it up at some point." I thought of it as being like how you use imaginary numbers in math, where you can use -1^.5 even though it's not a real number, so long as you cancel it out later on. I figured that the debt is a theoretical debt, and it doesn't matter so long as you eventually balance the books. But if so, well, why not just say "sod it, let's pretend that debt never existed."

What the US does is for every dollar they spend that they don't have they print a T-bill and then sell it to another country. Which is how you get countries like China and India "owning" a good part of the US debt, so the US better hope to whatever god they pray to that the Chinese don't cash these things.

That at least is my understanding, I'm by no means an economist though.

[Grundig]

I dunno if the Chinese could cash the bonds in early though. I mean, we can't pay them back and they know it. It's a really long-term way of doing things, which is the trade off when dealing in something that's considered 'super safe.'

[colmquinn]

i read recently of a florida woman who was about to get her house repossessed so she told the bank to prove she owed them the money by showing her the original agreement she had signed, which the judge allowed, and lo and behold the bank couldn't find it so the bank now has egg on their face and the woman is now in a much better position to argue her case. Not sure what is happening with the case now but at least it has bought her time to get more money together to keep her house

On a less nice note it was revealed recently here that someone in a bank in ireland here was trying to sell a developer who owed the bank €20m the original agreement for €2m so it could be forgotten about. fraud squad were sent in but then again the place was rife with less than 100% business practices it seems so this might just be the tip of a particularly dirty iceberg

[SteveK]

Regarding U.S debt, consider:
http://www.treasurydirect.gov/NP/BPDLog ... ication=np

A significant portion of U.S debt is owed to (rather oddly I might add) the U.S government.

Essentially what happens is that when certain branches of the government run a surplus, such as Social Security, they are required to buy T-bonds.

[Sionnach Glic]

So the US government is in debt to itself.....okay.

[Teaos]

China owns most of Americas debt, as is my understanding,

They kept on buying up debt which is generally a bad investment so they could keep there dollar down and rack in the money in the manufacturing industry.

[Monroe]

Well the US owing so much to China really helps the Chinese also because look at how we have to ignore their human right abuses? Even in Obama's administration Clinton was placating and sticking up to the chinese and to me it smelled simply of the Chinese owning too much of America's debt.

[Sionnach Glic]

I don't think it's because they own US debt, it's because there's nothing to US can do to them. They get most of their exports from there. Putting economic sanctions on them is only going to hurt the US (and the rest of the world) as well.

[Monroe]

yeah. Its a sad day when economics prevents morals even in an administration that has otherwise sound morals.