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All Debt is NOT the Same

This story will explain the differences in debt.  This is necessary because too many Wall Street talking heads and economists are equating U.S. Treasury Securities (federal debt) to all other types of debt including debt issued by Greece and other EU countries.  It’s not the same. 

PRIVATE SECTOR DEBT

1)  Households/Families (Debt is Evil for Families)

Mortgage debt - this is debt that is secured by or “borrowed against” the real property - home and land.  The actual mortgage document which is recorded with applicable local governmental authority represents that lenders interest in the real property

Credit card debt - this debt (vicious) is typically unsecured meaning the line of credit is not extended against any property - real or personal.

Auto loans - typically this loan is secured by the automobile. 

2)  Corporations/businesses

Commercial paper and notes - typically short term in nature and used to finance short term cash needs.

Bonds - long term debt typically used to finance capital projects.

Asset backed securities - debt that secured by a pool of assets such as mortgages or some other asset that offers a stream of cash

Corporate/business debt can be unsecured and secured.  There can be various layers of “claims” or priorities to payment on debt.  Corporate/business can be very straight forward or very complicated.

GOVERNMENT SECTOR DEBT

1) Municipal, state and local agencies - typically these entities issue debt in the form of long-term bonds that are either “general obligation” or “revenue”.  “General obligation” bonds means that the payment of the bonds is backed by the credit and taxing authority of the entity.  “Revenue” bonds means payment of bonds is backed by a certain revenue source such water/sewer fees or toll road revenue.

2) U.S. Treasury Securities - U.S. Treasury Department issues Treasury Bills (1 year or less), Treasury Notes (2 to 10 years) and Treasury Bonds (20 and 30 years).  The payment of these debt instruments is backed by the “full faith and credit” of the U.S. Federal Government

WHAT’S THE DIFFERENCE?

Private Sector vs. U.S. Federal Government - The reason why the debt is different is that private sector debt has limitations on sources of payment - meaning limited resources.  If the private sector exhausts those resources or has negative “net worth” (liabilities are greater than assets) it will be declared insolvent and may be forced into bankruptcy.  Federal government does not have such a limitation and NO ONE can force the federal government into bankruptcy.  In fact, there is no legal procedure for bankruptcy of federal government - it’s just not possible.

Municipal & state Sector vs. U.S. Federal Government - Similar to above.  Municipal and states have limited resources and there is a bankruptcy procedure for municipal bodies - Chapter 9 of U.S. Bankruptcy Code.

U.S. Federal Government vs. Greece, Spain or most EU Countries - the difference is huge.  U.S. has a monopoly over issuance of currency.  EU countries do NOT - they belong to a “monetary union” - based on the Euro (except for England which still has its own currency) and the issuance of Euro is determined by the European Central Bank.  The other major difference is that U.S. issues debt in its own currency (dollar) and again because of the “monetary union” Greece, Spain, Ireland and Portugal do not have such benefit.

All debt is not the same.  Any one who is claiming otherwise either is clueless as to how our financial system functions, a neoliberal/conservative economist (but are also clueless) or has a financial position in some securities that they are trying to protect (ie. - short selling U.S. Treasury futures or owns sovereign debt credit default swaps). 

Good luck.