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Comment by pjc50 | Hacker News Reader

Reminder: $250t debt is $250t assets on someone else's balance sheet. The money is not owed to aliens but to other humans.

Finding who is is owed to is harder. A big chunk is pension funds, insurers and so on, where one person's debt is another person's retirement savings. Which must increase overall as life past retirement does.

But a large chunk is assets of financial industries and the super wealthy, and in order for it to be net paid down they have to get poorer - or at least be forced to reallocate to equities.

(Note also that as interest rates drive ever lower debt naturally expands too. If they can be driven negative it becomes an advantage.)

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Finding out who owns the debt is harder. Figuring out who will be pulled in to help unwind the debt in a large-scale default scenario is well nigh impossible, because there seems to be a real risk of the losses being socalised to someone. Mentioning that the Cyprus bail-in [1] could happen anywhere makes me feel like a conspiricy theory; except it happened and there is no reason it couldn't happen elsewhere.

$100,000 sounds like a lot until you do the figures on what a responsible person needs to save if they don't want to wear the risk of the social welfare system comes under sustained attack while they are trying to retire. That sort of possibility is ugly, but you'd be mad not to acknowledge it as a potential threat.

I suppose the ultimate point is that when debt becomes unpayable, someone has to wear the losses of assets suddenly ceasing to exist. Anyone with meaningful savings is at risk in a big system-wide events because even if you understand the situation very well the rules can change in a crisis, making it very hard to control risk.

The numbers are bigger now, wages aren't that much better, savings are as low as ever. If 2008 was bad, the next one could be worse in terms of wiping out wealth. Scary time to be facing retirement.

[1] https://en.wikipedia.org/wiki/2012%E2%80%9313_Cypriot_financ...

> Reminder: $250t debt is $250t assets on someone else's balance sheet.

It's only an asset when people believe they are to be repaid. It's not uncommon for a debt holder to value debt lower than the amount.

So in a perfect world debt = assets, and then some. This conversation is about a possible stressed system. In this scenario it's not fair to say debt is equal to assets and therefore all is ok.

One of the most illuminating comments I heard recently was on a Bloomberg podcast where they made the point that fiat money is a closed system. Money can flow between economic actors, and it can obviously influence behavior, but in both a theoretical and real sense it is really just an abstraction that hovers above the physical world. That's not to deny the economic effects of monetary policy, but I do think it helps clarify a lot of monetary phenomena.

Yes. It's deeply out of fashion but trade balances are also important. If your country is producing more than it's consuming then debt is unlikely to become a problem.

Yep, but the same applies to debt as well. A contractual IOU may say seem abstract but it can be almost as valuable as the money itself (sometimes more valuable, with attached APR).

That doesn't seem like a closed system, though? The main limit on debt is the market's willingness to keep buying it. Figure out a way of increasing trust and it can go higher.

It's not, which is one of the great benefits of being able to harness debt financing.

It is not exactly closed. We also pump new money into the system based on our models for the actual increase of the gdp. Many times our models are off and we create inflation because of this (even if someone has no agenda).

Language and mathematics are two more abstractions that "... hovers above the physical world."

True. It's important to remember debt isn't a perfectly liquid asset because one or more countries may decide it's not worth repaying, then it becomes tantamount to a pyramid scheme of borrowing. If/when that happens, the power of the West may fall into slightly different hands of mafia-types as did the Soviet Union. Greece also comes to mind.

One interesting thing to consider is that countries holding larger and larger amounts of each others debt could be stabilizing in geopolitics. If your neighbor owes you $100 you aren't going to punch him because you would never get the money back.

Oh, debts survive wars. They can often outlive countries. France is still paying a single annuity from 1738, although countries have learned not to issue eternal debts since then.

https://www.cbsnews.com/news/a-government-pension-thats-last... if anyone else is interested

And it took the UK until December 2006 to finally repay the USA and Canada their WW2 debts http://news.bbc.co.uk/2/hi/uk/6215847.stm

...has the UK changed governments since then? I must’ve missed that.

They usually don't. What you are taking about is worth only 1.20 euros a year.

https://www.cbsnews.com/news/a-government-pension-thats-last...

Germany is paying the Catholic (?) church nearly half a million every year because of a contract from 1803

That's true, but somewhat dependent on which currency the debt is denominated in.

Default is definitely a thing, as are bondholder "haircuts", but that's what the IMF is for. They're coercive but not corrosive to the rule of law like mafia. Former Soviet union oligarchs came about due to privatization rather than debt.

Is there a scenario you can envision where the Soviet Union didn't devolve into a mafia state? Or is that the most stable equilibrium given its history?

Well, other former communist states did better, such as Poland, Romania, the Baltics, Hungary.

The problem was really that the prize was too big. Russia had the oil production. That made it worthwhile doing whatever was necessary to steal control of the money flowing from it.

(Perhaps a more salient question is how and whether the US can be prevented from turning into a mafia state; will the ongoing prosecution roll up the network, or will the network roll up the prosecution?)

> Reminder: $250t debt is $250t assets on someone else's balance sheet. The money is not owed to aliens but to other humans.

The problem is there is no guarantee that those assets on the balance sheet are actually real. This is a global aggregate which is owed from humans now to humans in the future, and using micro-scale accounting identities isn't appropriate.

Those graphs are indicating that real production is insufficient to meet future consumption. When that happens, there are serious consequences.

Those consequences can take the form of deflationary writedowns, an inflating currency, or a combination of both. Whatever the case, the the people of the future don't get the results the people of the present have promised.

You can't judge things based on a 0% default rate. Some of the debt is expected to never be paid back. Lots of high interest debt heavily bakes that in, so counting them as held to maturity with 0% default is just going to make your statement tautological.

> But a large chunk is assets of financial industries and the super wealthy, and in order for it to be net paid down they have to get poorer - or at least be forced to reallocate to equities.

Do you have better data on the super rich? My impression was that they typically own companies and stocks, not T-bills. So if the top 10% don’t own the debt, it’s the next 40% (middle class) that will have to get poorer to reduce debt.

One thing to keep in mind is that government debt is private sector savings. The money in your bank account originated as government spending or private sector borrowing. All money is debt. If the government pays back it's debt, it will make it impossible for you to be solvent. If there was no government debt, there would be no money.

The US government was in debt since this country started, and will remain in debt in the future. The government being in debt is no problem, it's not a household. Government debt is not a problem, private sector debt is.

You should clarify that "assets on someone else's balance sheet" refers to paper assets, which by itself is nothing but a claim and may be as good as no assets. You'd have to track down the use of the debt to find out if there are real assets anywhere.

Wasn't that pretty much the problem of the financial crisis? That a lot of institutions had nothing real on their balance sheets but only paper value which could disappear instantaneously if perceptions change?

No, the problem is that the collateral backstopping the debt lost value, meaning that if people defaulted on the debt the financial institution could not recoup much of the loaned money.

The original money did change hands though. It just ended up with builders, flippers, and real estate agents.

The majority of the debt was synthetics on the underlying, not the original debt.

I think that only affected how easy/hard it was to determine whether the collateral was good or not. passing a note around doesn't really affect the original amount unless there's some premium or discount on the original value.

For example, if 10 people borrow $10 from Alice, she is owed $100. If she packages that as 10 separate loans with one dollar of debt from each person and sells them for $10 each to 10 other people (Bob, Billy, Blake, etc), she's no longer owed anything, but the people downstream she sold it to are. In this case, her reselling has resulted in no additional total debt, but it is harder to tell whether the loan contains deadbeat non-payers or not. If the second set resells again, the obfuscation is even greater.

If Alice or some downstream seller sells for less or more than the original loan for some reason (or with different interest, which can't be forced upstream?), then the total debt amount might change.

In any case, it's still all down to whether the original loans are secure or not. If the people default, and there's no collateral, the end result is no different how many times it's been resold (if no amount has changed), it's just a matter of who is affected and how easy it is to tell whether the loans are of good quality or not.

Although, if I'm mistaken about or missing something, I would definitely like to know.

My knowledge here comes from the film Big Short so take that with a grain of salt lol, but they explained it as a step beyond what you describe in that a synthetic CDO as more a bet or insurance on the underlying bundled debt. So like placing a bet of $1000 that the $100 debt owed to alice wont default.

https://www.youtube.com/watch?v=EEXTqtH-Oo4 https://en.wikipedia.org/wiki/Synthetic_CDO

Do the rich have to pay interest on their debt, or is it just me who has it on his mortgage? I tend to avoid taking loans because of the riscs and because of interest, why do the rich take up this debt?

Generally you take out a loan at X% if you have some opportunity that will pay back >X%.

Also, loans can help with liquidity. I'd rather have $1,000,000 cash and $999,999 in debt than $1 to my name. You can work with a million dollars in ways you can't with $1, even if your net worth is the same.

Everyone pays interest, the rich just pay less because they are less risky.

A rich person might rather buy 5 houses with a 20% down payment and 80% debt rather than 1 house with cash.

Only if those houses make them money or their money yields more than the debts cost.

On the books...debt/liability is offset with either an asset or "expense".

An asset has enduring value, it remains on the books year after year.

An expense however, is only on the books for the current year, then it gets rolled into owner equity. Expense shrinks owner equity. In fact, owner equity can go negative in extreme situations.

A portion (I'm not sure how much) of the $250t in debt was certainly spent on expense. There is no way to get that portion back...the funds do not exist.

Asset and debt are balance sheet quantities. They can be measured at a point in time. Revenues and expenses are flows on the P&L. They are measured over a period of time.

> Which must increase overall as life past retirement does.

I thought age expectancy is starting to drop now.

In the U.S., certainly: https://www.cnn.com/2017/12/21/health/us-life-expectancy-stu...

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