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Questions tagged [debt]

An obligation to pay another party at some point in the future. Examples include national debt, corporate bonds, and household credit.

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57 views

How come debts is higher than assets?

Investopedia has a definition about Debt ratio, I do not understand how come Debt ratio can be higher than 1. Because it means that equity is negative (because Total Assets=Debt+Equity).
2 votes
1 answer
59 views

what portion of US consumer spending that is debt-financed (looking for data source)

In a piece from Business Insider, we read: US households today have a savings rate of just 3.7% — way below the historical levels of 9%. Meanwhile, consumer spending exploded by \$208 billion in the ...
14 votes
5 answers
8k views

Why do lenders dislike early loan repayments?

I've frequently seen references in blogs and articles about how banks and other lending agencies like to refer to people who repay loans on an accelerated schedule as "deadbeats", because they get ...
0 votes
0 answers
43 views

By how much does debt exceed credit in major currencies?

Fiat currency is created by issuing loans. Assume 100 crowns (a non-specific currency) existed before the crown became a fiat currency. Every time a new 100 crown loan is made, 100 crowns of credit ...
1 vote
1 answer
96 views

Expected vs actual inflation and the real debt burden

The real rate of return is given by: 1+r=(1+i)/(1+π) and it can easily be shown that: 1+r ≈ i-π+1 so that r ≈ i-π This can be used to calculate real rates of return, or equivalently the real debt ...
0 votes
2 answers
1k views

Why does the Loanable Funds Market model use the real interest rate instead of the nominal interest rate?

As far as I understand, the majority of loan contracts specify a nominal interest rate, NOT a real interest rate. So a hypothetical loanable funds markets would have people suggesting potential ...
0 votes
0 answers
13 views

Calculating Effective Maturity with Negative Cash Flows

The formula for effective maturity. Suppose that an installment plan also shows additional borrowings of a debtor. That is, at some point in time (other than the inception date) the borrower is given ...
0 votes
1 answer
92 views

Debt Held By The Public

Following off the back of this question on debt-to-GDP vs. debt held by public-to-GDP - Difference between "Debt Held by the Public" and "Total Public Debt Outstanding"?: So in ...
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2 answers
244 views

Why does increase of national debt of the USA not lead to inflation?

Increase of national debt is increase of money supply. But why does increase of national debt of the USA not lead to inflation? Thanks.
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2 answers
72 views

Would it work? A tax that automatically toggles on-off

Could we create a tax that automatically toggles on or off depending on the state of the economy taking into consideration that the revenues would be saved for further use, either to stimulate the ...
0 votes
2 answers
206 views

How does a bail bondsman make a profit?

I hope I'm asking this on the right site and used the right tags. When looking into the concept of bail bonds on Google, I was told bail bondsmen are paid a fee to post a defendant's bail- but also ...
0 votes
2 answers
586 views

How do bonds & shares relate to the money supply?

Non-eocnomist here. I'm trying to understand how money works, and what "money supply" means. I understand about how banks take deposits and lend them out, turning short term loans (the ...
2 votes
1 answer
84 views

China interest rates

"the PBoC said it would keep interest rates below the nominal GDP growth rate as a way of maintaining debt sustainability. But this only makes debt "sustainable" by implicitly ...
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0 answers
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Is it true that the eight richest men have more wealth than the bottom 50% of world population?

This statistic from Oxfam, an anti-poverty consortium, has been reported in prominent media outlets (example). Other articles dispute this statistic as misleading due to flimsy assumptions about debt (...
3 votes
2 answers
528 views

Is Fiat Money Ultimately Tax Based?

First, I am not an economist, so seeking general "good enough" answers. Since Nixon went off the gold standard the U.S. dollar has been a fiat currency backed by federal debt. While I ...
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0 answers
50 views

Do banks influence each other's decisions to issue bonds, via a dependency graph?

This questions is about how to model the growth of a bond market. Consider a large set of banks, such as HSBC, BNP Paribas, etc, that can enter into syndication (i.e. join together in small groups) to ...
1 vote
1 answer
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Meaning of $\frac{A}{r}$ in standard debt model:

Given the model of debt and repayments given by the first-order linear ordinary differential equation (ODE): $\frac{dD}{dt} - rD = -A$ In this model, $D(t)$ represents the consumer's debt at time $t$, ...
27 votes
13 answers
11k views

Why do banks take deposits if they do not need them to make loans?

I have taken some economics courses in university, where I was introduced to fractional-reserve banking. From my understanding, in fractional-reserve banking, the bank has motivation to encourage ...
1 vote
0 answers
44 views

Why would a company file for bankruptcy now when it can always do so later?

Taking FTX as an example, I know they took depositors' funds, send them to SBF's other company Alameda Research which then made risky crypto investments and failed. This made FTX hold less assets than ...
0 votes
2 answers
82 views

How can debt be larger than gdp? [closed]

government is taking debt because they spend it all at once and pay it over time so if you spend all at once there will be increase in gdp(multiple increase in gdp as money changes hands multiple ...
0 votes
1 answer
70 views

How come Greek debt is only a few dozen bps above US debt?

I see Greek 10Y debt yielding only +86bps spread over US 10Y debt. Greek debt to GDP runs above 190% and was not decreasing even prior to the pandemic response. Moreover, Greece has gone through ...
1 vote
2 answers
94 views

Is there any example of being in debt not being considered particularly bad? [closed]

I was thinking about how useful debt is, in contrast to a common sentiment that it’s a ball-and-chain to be avoided. Without credit, one can hit zero funds with no alternative. With credit, one can ...
0 votes
1 answer
38 views

How does debt-financed public infrastructure spending stimulate the economy if money supply is unchanged?

When a national government embarks on public infrastructure projects to stimulate the economy, the money spent on the infrastructure projects increases the money supply. However, if the projects are ...
2 votes
0 answers
112 views

WACC: forward looking vs. backward looking

I have learned from the thread "Cost of debt, taxes and WACC" that WACC is forward looking in that it disregards the interest rate on debt already taken by the firm but rather use debt's ...
2 votes
2 answers
36 views

Effect of tax on required return on debt (and equity)

Debt financing has a tax advantage over equity financing, as the borrower gets reimbursed the tax on interest payments and other debt-servicing costs. Thus $$ R_{\text{WACC}}=\frac{E}{E+D}R_E+(1-T_C)\...
2 votes
0 answers
43 views

Cost of debt: How to adjust YTM for the possibility of bankruptcy?

When calculating the weighted average cost of capital (WACC), it may be tempting to use the debt yield (yield to maturity, YTM) as the cost of debt. However, Berk & DeMarzo note in Chapter 12 of &...
2 votes
2 answers
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Does a private company that is 100% financed by a bank loan have a WACC equal to the interest rate?

When estimating a company's Cost of Debt for a Weighted Average Cost of Capital (WACC) calculation we normally look into its bond yield. But for a private company with 100% debt capital structure, ...
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1 answer
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Cost of debt, taxes and WACC

I am studying the cost of debt. Without loss of generality, suppose the debt consists of bonds. On the one hand, some textbooks (e.g. Hillier et al. "Fundamentals of Corporate Finance: 4th ...
1 vote
0 answers
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How does high external debt hurt GDP?

Really confused by this. Say debt burdens increase and country A now has to spend more of its income towards servicing its debt to country B, causing a fall in consumption. Country B now has more ...
4 votes
0 answers
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Consequence of student debt forgiveness

US government has recently announced student debt forgiveness plan (link). What are the consequences of student debt forgiveness that is discussed in the economics literature, encompassing its effects ...
3 votes
2 answers
1k views

How much leverage has the Federal Reserve taken on today (Jan 2016)?

http://nymag.com/daily/intelligencer/2015/12/big-short-genius-says-another-crisis-is-coming.html?mid=twitter-share-di What makes you most nervous about the future? Debt. The idea that growth will ...
-1 votes
3 answers
240 views

Can this transactions log become "money"?

TL;DR: Mankind started trading in barter. Trade was simple so people could use word of mouth, their brain, or pen and paper, to find barter trade deals. However, as trading networks grew in size, ...
1 vote
0 answers
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Eurozone crisis between 1990s-2010(?)

Earlier when the Eurozone is established, the countries have a problem of competitiveness: the growth of wages is much faster than the growth of productivity. This high salary results in high prices ...
-1 votes
1 answer
43 views

What was Debt Burden in 2008?

Ray dalio in this video "how the economic machine works" shows the debt peaking at 400% https://www.youtube.com/watch?v=PHe0bXAIuk0 When I look at a different source, I don't see anything ...
1 vote
2 answers
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long term and short term debt cycle

Ray dalio in his video "how the economic machine" claims the economy works in cycles. Specifically, he claims there is a short-term and a long-term debt cycle. https://youtu.be/PHe0bXAIuk0?...
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1 answer
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How does inflation make the impact of public debt better?

Why is a high rate of inflation better for weathering effects of a huge govt. debt ?
0 votes
3 answers
86 views

Are fixed rate mortgages better in periods of low interest?

Conventional wisdom is to lock in a low rate (by getting a fixed-rate mortgage instead of ARM) while we're in a period of historically low interest rates. Assuming that you are going to own a house ...
3 votes
2 answers
852 views

What is the difference betwene a partial default and having debts partially written off?

From The Daily Telegraph: The new Syriza-led government has demanded some form debt write-off on the country's €317bn liabilities, two-thirds of which are owned to official creditors in the form of ...
4 votes
1 answer
182 views

How much of Greece's public debt is created by its trade deficit?

How much of the Greece trade deficit reflects into it's public debt? Each year, Greece is importing about two times as much as it's exporting. In some years, even three times more. How much of that is ...
0 votes
2 answers
52 views

Understanding Debt Deflation

I read the following explanation for debt deflation in my textbook: To better understand how this decline in net worth occurs, consider what happens if a firm in 2018 has assets of 100 million (in ...
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1 answer
50 views

When debt to GDP is only around 85%, how can this article quote as 300%?

I was reading an article in FT, where debt to GDP is quoted as 300% for US and Japan. However, all the official sites for US quotes the debt to GDP as 85% for US. This article is from a reputed ...
3 votes
2 answers
450 views

Printing Money vs. Issuing International Bonds

I'm reading Niall Ferguson's The Ascent of Money and I had a question about the economic difference between printing money vs. selling bonds to foreign entities. At one point in the book, the author ...
0 votes
1 answer
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What would the theoretical ramifications of a mass sell-off of United States bonds be?

If a sovereign nation or nations were to sell off large amounts (say 30%) of United States bonds, what effects would it have on the United States' economy and debt situation? I am guessing that a mass ...
0 votes
1 answer
23 views

Problem with the definition of external debt

This is how external debt is explained in wikipedia: "In public finance, external debt (or foreign debt) is the component of the total government debt which is owed to foreign creditors; its ...
2 votes
2 answers
197 views

Is it possible to repay the world debt? If not, why do we care?

Let me apologize if my questions sound stupid to experts. I have no training in economics. I am just curious and puzzled. I couldn't find any answer to the questions below. As far as I have ...
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0 answers
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Debt cycle theory of Ray Dalio

I recently started reading Ray Dalio's book regarding BIG DEBT CRISES. He compared there, economy to the monopoly board game. There is something I don't quite follow in this analogy. If you ...
3 votes
4 answers
1k views

A bank approves a loan: where does the money come from?

In the naïve picture of the banking system, banks strike a balance between savings invested in them by savers and the loans requested of them by borrowers. The money loaned to borrowers is the same ...
3 votes
2 answers
4k views

What would happen if China called in its debt?

I was talking with a friend of mine the other day about Trump putting the 35% tax on all overseas manufacturing. Couldn't this hurt those countries that have plants where US manufacturing comes from? ...
1 vote
1 answer
33 views

How is the United States net foreign wealth affected by a depreciation of the US Dollar?

My thought here is that if the dollar were to depreciate, then the value of US liabilities would decrease while the value of their assets would increase. Moreover, the US trade balance would become ...
1 vote
2 answers
222 views

Why do we need to borrow?

(I have super limited knowledge with economics/finance/etc so please forgive me for any misunderstandings or misrepresentations.) Why do we need debt? People who make profit by lending to others don't ...