Debt is that which is owed.
People or organisations often enter into agreements to borrow something.
Both parties must agree on some standard
of deferred payment, most usually a sum of money
denominated as units
of a currency,
but sometimes a like good. For instance, one may borrow shares,
in which case, one may pay for them later with the shares, plus
a premium for the borrowing privelege, or the sum of money required
to buy them in the market at that time.
There are numerous types of debt obligations. They include loans,
promisary notes, and debentures.
It is very common to borrow large sums for major purchases, such
as a mortgage,
and pay it back with an agreed premium interest
rate over time, or all at once at a later date. The amount of
outstanding is usually called a debt. The debt will increase through
time if it is not repaid faster than it grows. In some systems of
economics this is usury,
in others, this refers only to the excessive rate of interest, in
excess of a reasonable profit for the risk
As noted above, debt is normally denominated in a particular monetary
and so changes in the valuation of that currency
can change the effective size of the debt. This can happen due to
so it can happen even though the borrower and the lender are using
the same currency.
Thus it is important to agree on standards of deferred payment in
advance, so that a degree of fluctuation will also be agreed as
acceptable. It is for instance common to agree to "US
dollar denominated" debt.
The form of debt involved in banking
gives rise to a large proportion of the money in most industrialised
nations (see money
money for a discussion of this). There is therefore a complex
relationship between inflation,
supply, and debt. The store
of value represented by the entire economy of the industrialized
nation itself, and the state's ability to levy tax on it, acts to
the foreign holder of debt as a guarantee of repayment, since industrial
goods are in high demand in many places worldwide.
Lendings to stable financial entities such as large companies
or governments are often termed "risk free" or "low risk" and made
at a so-called "risk
free interest rate". This is because the debt and interest are
highly likely to be repaid. However, if the value of a currency
has changed in the meantime, the purchasing power of the money repaid
may vary considerably from that which was expected at the commencement
of the loan. So from a practical investment point of view, there
is still considerable risk attached to "risk free" or "low risk"
lendings, even though in terms of the amount of a currency that
will be returned there may not be. The Bank
for International Settlements is an entity that sets rules to
define what loans qualify as "risk free" or not. It is a very powerful
institution, formed by the Bretton
Woods agreements, which has had a pivotal position in central
banking since 1947 when it opened.
Debt allows people and organisations to do things that they otherwise
wouldn't be able or allowed to. Commonly people in industrialised
nations use it to purchase houses, cars and many other things too
expensive to buy with cash on hand. Companies also use debt in many
ways to leverage the investment
made in their private
The properties of debt have been blamed for exacerbating economic
problems. For example, during the onset of the Great
Depression there was deflation,
which effectively made debt throughout society grow. This resulted
in a contraction of consumption
since the borrowers were on average people who had to consume less
due to the increased proportion of their earnings going towards
repayments while the lenders were on average people who would invest
their extra purchasing power. The reduction in consumtion reduced
business activity and caused further unemployment. Also in a direct
sense, more bankruptcies
occurred due to increased effective debt than otherwise might have
been the case.
Large organisations can break their debt into many small units
of debt. These small units of debt are known as bonds.
entitles the holder to the remaining repayments on that unit of
can be traded during the repayment period, and so ownership of the
debt is seen as a form of investment.
Because bonds are traded on a regular basis, they have a fluctuating
price. This implies that the overall debt represented by the total
number of any particular type of bond also has a fluctuating price.
Borrowing and repayment arrangements linked to inflation indexed
units of account are possible and are used in some countries. For
example, the US government issues two types of inflation indexed
- TIPs and I-bonds. These are one of the safest forms of investment
available, since the only major source of risk - that of inflation
- is eliminated. A number of other governments issue similar bonds,
and some did so for many years before the US government.
In countries with concistently high inflation, ordinary borrowings
at banks may be inflation indexed also.
It is possible for some organisations to enter into alternative
types of borrowing and repayment arrangements which will not result
in bankruptcy. For example, companies can sometimes convert debt
that they owe into equity
in themselves. In this case, the lender hopes to regain something
equivalent to the debt and interest in the form of dividends and
capital gains of the borrower. The "repayments" are therefore proportional
to what the borrower earns and so can not in themselves cause bankruptcy.
Once debt is converted in this way, it is no longer known as debt.
Similar arrangements could exist for individuals in that
they could agree to repay a percentage of their earnings for a set
amount of time in return for a sum of borrowed money. The lender
would need to evaluate the future earning capacity of the borrower
(this is possible and is often done anyway when lending), but more
difficult would be the necessity to track how much they do in fact
earn during the "repayment period". Typically, only governments
can track earnings of individuals in such a way, and so such arrangements
are only currently of use to governments. It is possible to view
a portion of taxes as such a form of repayment in return for the
cost of government services previously "lent" to citizens, for example
education when the citizen was young or government paid maternity
leave for the citizen's mother to look after them. Such views occasionally
form part of justifications and structuring of some taxation. Some
taxes in some countries are only collected from individuals that
have received particular services, such as university education.
Such an arrangement provides an incentive for the government to
make the education useful, since they are sharing in the proceeds
There are many arguments against debt as an instrument and institution,
on a personal, family, social, corporate and governmental level.
Usually these refer to conditions under which debt should not be
used as a solution, e.g. to fund consumption for survival. Consumer
debt and public
debt deal with some of these issues.
Some theories of economics
argue that debt is itself a problem, and should not be the foundation
on which contracts are made between persons, organizations and nation-states.
Those theories that hold it as wholly undesirable are often called
economics, and are also often related to theories of economics
that look more basically at fundamental scarcities: clean air, clean
water, safe food, shelter:
economics, concerned with the equity of distribution of these
things and the potential for unrest if simple luck is permitted
to cause some to starve while others prosper, simply for having
held a safer debt asset through a catastrophe, has alternative instruments
that do not obligate repayment in the sense of debt but instead
act as a joint venture type instrument. The justification for this
is a hadith
which states as a rule of trade: "nothing present for that which
is absent". This avoids the problems of the devaluted asset or bad
debt becoming a source of unrest later on, should it be devalued
or defaulted through no fault of the borrower. Since Allah
intends the misfortune to fall on all those involved, the argument
goes, to leave the debtor obligated and the creditor with recourse
to the state for collection, is to defy God. Christian
philosophy is also often concerned with these very issues.
economics is more concerned with the ultimately coercive nature
of debt and the circumstances into which it is entered, and the
consequences of having to liquidate one's resources, or even one's
directly, to repay debt undertaken for consumption - or mere survival.
Unequal distributions of force required to collect debt, unequal
vulnerabilities to coercive pressures of a society
in general, are seen as hopelessly slanted against the female, who
is a perpetual debtor, versus the male, who is a perpetual creditor,
given the relative masteries of deadly force, and the vulnerability
of mothers and the children to which they are closely bonded: debt
bondage accrues more to women than men, and may even require
the sale of children - often for sexual uses by men. Thus, debt
simply reflects patriarchy,
and even such female-friendly schemes as Grameen Bank are suspect
because they are ultimately seeking to get women to "perform" in
an economic system that is defined by, and for, men, for male desire.
economics makes an argument from ecology:
yield of natural
capital is quite limited by current
solar income and other factors, such as water, topsoil, shade,
nutrients and pollination. Nature's
services only restore the capital so fast. Any interest
rate greater than this nature rate of restoration necessarily
obligates debtors to deplete the capital reserves of nature, and
thus the services themselves, simply to repay the cash debt. This
to the bottom is exacerbated by competition - thus the slowest-recovering
systems are forced to depletion even faster by "need" to compete
with faster-recovering ones which have a higher yield and thus likely
receive more attention from the exploiter. Even an interest rate
less than the rate of depletion, charged on the land or rights of
access, can lead to disaster if there is a high capital
cost and thus equipment depreciation to repay. A particularly cogent
example is fishery
which are increasingly dependent on high-tech machines, creating
fewer jobs, but depleting more fish stocks and forests, simply to
repay the debts on equipment, which is ever more sophisticated.
Thus, debt-financed infrastructural
capital is analogous in this view to weapons:
their only service is to compete, threaten and ultimately destroy
all value in the long run. They do not "produce" on any kind of
basis. The availability of debt itself to finance these machines
and technologies is a problem, and not just of economics.
Short of bankruptcy, very often debts are wholly or partially
forgiven. Traditions in some cultures demand that this be done on
a regular (often annual) basis, in order to prevent systemic inequities
between groups in society, or anyone becoming a specialist in holding
debt and coercing repayment.
Global debt has reached the scale that many economists
are convinced that forgiveness is the only way to restore any global
equity in relations for the developing
nations who, as predicted by green economics, are often despoiled
simply to repay it. This movement has very broad support but predictably,
not among most bankers.
- External debt (Foreign debt).
- Domestic debt.