Headline Nov 10, 2014/

''' DEBT- *BY* - DROWNING? "'

IN GERMAN,   -the word for debt is   Schuld. This is also means  sin , a view that many Germans still seem to hold. 

*DEBT*   -is possible the oldest financial instrument, older even than money.

Archaeologists have unearthed Babylonian tablets of sun-dried clay recording obligations incurred in the third millennium before Christ. But despite its venerability debt is not much respected:

And it never should be.

It was the growing rate of default on home mortgages in America that precipitated the financial crisis some six years ago.

These delinquencies, although not enormous in themselves, became impossible for some investment banks to bear, thanks partly to their own heavy debts.

As the contagion spread throughout the financial sector in  2007-08, nervous or cash-strapped banks and other creditors stopped lending, thereby infecting the rest of the economy.

Deep recessions and big financial rescues then lead to a surge in government debt. That, in turn, raised fears about the solvency of various countries in the euro area, culminating in Greece's default in 2012.

Debt was, then, both a cause and a consequence of the crisis, and remains a big reason for its continuance.

Economists tend to see debt as a useful means to get money where it is most needed, from creditors with an excess of it, to borrowers who are short of it.

The broadening and deepening of international credit markets that preceded the financial crisis was considered a spur to growth, since it gave even more borrowers access to bigger loans than at lower rates of interest.

When disaster struck, however, debt turned from a ladder into a chute. Working out what went wrong, and when debt turns dangerous, has become a precipitation of economics in recent years.

Thus, those who run up debts are assumed to be profligate and those who chase them down mercenary and unfeeling.

***That is because debt is peculiarly unforgiving instrument : It must be paid in full and on time, come what may***.

That distinguishes debt from some other financial liabilities, such as shares, which are more flexible, promising only a cut of the profits, whatever they may be.

Before  2008   most macroeconomic models made little room for debt  -especially of the private, domestic sort,  let alone default.

At the level of economy as a whole, after all, borrowers and creditors cancel each other out: every dollar by someone is also owed to someone. Thus the liabilities of all debtors and the assets of all creditors add up to zero. That makes debt seem trivial.

Clearly, debt is far from trivial, and its unwinding not always a zero-sum game. Yet including it in economic models require macroeconomists to wrestle with awkward complications, such as ''heterogeneity''   -(dividing the economy into debtors and creditors)-  and

''Discontinuity''  -(allowing for the abrupt breach of economic relations that default represents).

The alternative is to focus instead on empirical studies, poring over the historical record to find out when debt becomes dangerous.

Those dangers, it turns out, differ depending on who owes the debt  -governments, households, firms or financial intermediaries-   and what kind of debt they owe  (loans, or bonds, short-term or long)-

As well as the currency in which they owe it.

The Honour and Serving of this very important  operational research  continues. Thank you for reading and see Ya all on the following one.

With respectful and loving dedication to the thousands by thousands of Pakistani Students. Professors and Teachers who posed this question to me? See Ya all on !WOW!  -the World Students Society Computers-Internet-Wireless:

This post is also dedicated to the loving memory of Dr M Tufail Hashmi Querishi, an American trained,  Pakistan's first Aviation Medicine Specialist.

''' The Brief '''

'''Good Night and God Bless

SAM Daily Times - the Voice of the Voiceless


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