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25

I think there are a few separate issues here. First, semantics: if an institute doesn't let you deposit money into your account, I think we'd be hard-pressed to call it a "bank". This really doesn't matter to the fundamental aspect of your question, but I think it's of some use. Because a "bank" has to allow deposits (at least by a naive ...


20

In general, there are three kinds of debt: Secured debt, like a mortgage or a repurchase agreement. With a mortgage, for example, the debt is secured by a lien on the home, and if the debtor does not pay, the creditor can seize the home. Unsecured debt, like a credit card or corporate bond. Governments will generally allow creditors to liquidate many of the ...


18

Most of the same considerations apply to countries as apply to businesses and people, plus a couple of extra cons Pros of Being Debt Free No interest payments Not beholden to someone else (financial freedom) Cons of Being Debt Free Buying things on (interest free) credit can save a little money Paying for things in installments can match costs to income ...


17

The reason that lenders dislike early repayments (known as "prepayments" or "voluntary prepayments") is that most lenders match their assets— the loans they've made to others— with liabilities of their own. This can lead to lenders facing significant interest rate risk. This is important to understand— while default risk is certainly significant, interest ...


16

The short answer is No. Every single year, except 2009, for the past 55 years of continuously recorded economic history, the world has been getting richer. The -2.1% global recession in 2009 was made up in 2010 with 4.1% growth. I was just working with the World Bank's World Development Indicators, which track global GDP growth, and I double checked. We ...


12

Yes, upon the introduction of the euro on January 1, 1999, all debt (indeed, all nominal contracts) in participating countries was converted from national currency to euros at a legally defined conversion rate. See this press release from December 31, 1998, which states: In accordance with Article 109l (4) of the Treaty establishing the European ...


12

You have to understand how international debt works. These are not loans, but bonds. China buys a US bond for, e.g., 98 USD. This bond is a promise by the US Treasury to pay 100 USD one year from now. China owns a lot of this type of bonds. Once the bond hits maturity, China is paid 100 USD and the thing it typically does with these 100 USD is it buys the ...


11

As you have pointed out: where it comes from is very important. As to the Japanese situation it is quiet different from the US position from example. In fact most of the Japanese debt is owned by Japanese people (90% of the current debt). More specifically the BoJ plays a big role as a buyer, and puts pressure on Japanese yield, which makes it cheaper for ...


10

There is an interesting report that circulated during the Clinton administration, when we predicted we'd pay off all the debt, that I think answers your question. (here's a public radio article about it) The main takeaway is that government bonds are the safest and most liquid asset. Its existence is necessary for a large number of financial institutions (...


10

The classic answer here would be Libya and Brunei, but I think Libya now has debt. Brunei is a strange case in that it uses a joint currency with Singapore dollar, controlled by the monetary authority of Singapore, so in effect you can use Singapore debt as a substitute for Brunei dollar investment. Not having any debt, and having a free currency is ...


10

Yes, I imagine there's reason to contest that claim. Consider the GDP to debt ratio. While it has risen over time and with the recent recession, it was not too far away from Germany which is considered, I think, the absolute picture of fiscal health. Consider also the critical point that the US government does not have a chance of death like a normal ...


10

Purchasing new homes would count as an investment. According to Blanchard et al. Macroeconomics: a European Perspective pp 568 in glossary investment is defined: Investment (I): Purchases of new houses and apartments by people, and purchases of new capital good (machines and plants) by firms. The source above is the leading undergraduate macroeconomics ...


8

I don't think you can sensibly discuss this without including two additional factors: what is the prevailing interest rate? is the debt in local or foreign currency? The first affects the cost of repayments. Interest rates are at record lows in the developed world. How much money is it reasonable to borrow at 0%? What about -0.1%, is there even a limit ...


7

There is some concern about the interest rates (currently at -0.5%) fueling a housing bubble in Sweden. This article at Fidelity states: In a bid to track the ECB, Sweden has cut its interest rate below zero, a radical move that involves charging banks to hold some types of deposits with the aim of encouraging them to lend. Similar trends have ...


7

1) Debt matters because it smoothes (or unsmoothes) taxes over time, which matters because the deadweight loss from taxation is (roughly) proportional not to the tax rate, but to the square of the tax rate. 2) Because family sizes are not homogeneous, government debt (which transfers the tax burden to future generations) can redistribute the tax burden ...


7

Whether a country's debt is sustainable is a difficult question to answer. Bohn developped a framework for answering this question and the cited paper is a summary of much of its findings. Henning Bohn, 2005. "The Sustainability of Fiscal Policy in the United States," CESifo Working Paper Series 1446, CESifo Group Munich. Bohn proposes to estimate a ...


7

This isn't the first time I've seen people claim that this Bank of England article says banks don't need to take deposits, but in fact the article actually says the opposite. In order to make loans banks do need to take deposits or borrow money some other way: By attracting new deposits, the bank can increase its lending without running down its reserves [.....


6

Suppose your country holds debt equal to thirty percent of GDP and that the government is obliged to pay interest of five percent per year on that debt. This implies that each year the cost of servicing the debt is 1.5% of GDP. Thus, if the country's GDP grows at a rate of 1.5% then it can afford to service the debt indefinitely without the debt/GDP ratio ...


6

Yes it can. If debt originates from the banking system, then it potentially has a side effect of money creation. Whether or not money is actually created when a bank loan is made depends on the banking system's regulatory framework, and the lending policies of its banks, and these can vary widely. However if there is net excess of bank lending over bank ...


6

The fundamental reason, beyond any details about shifting interest rates, is that lenders are in the business of lending money. If you pay off the loan early, then they're doing less business. If you pay off part of the loan, you're paying less interest, which means they have to go out and find another source of income to replace you. Extreme case, suppose ...


6

Handing out the principal amount of debt gradually, in increments, is standard practice in investment loans extended by a bank to a corporation. The rationale is clear : the corporation wants to make an investment, say a new factory. The whole plan is laid out and the cash flows of the pre-operational, construction period are also detailed, based on ...


6

I think this perhaps seems/reads like a theoretical chicken-and-the-egg scenario, but IMO it's not really. The reality is just that fiat currency is like magic, and created out of nothing. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits Central Banks print fiat currency. Pieces of paper ...


5

The most famous perpetual bonds are UK Government Bonds known as consols. They weren't issued to avoid the rollover risk you highlight. Rather, their key benefit was liquidity. They could sell new consuls on the same terms as the old consuls and they have enhanced liquidity because it made the new and old issue more liquid. They turned out to be a pretty ...


5

Here are a few reasons that build on @Dismalscience's answer. Capital requirements: Banks don't typically need to hold capital against loans they originated but subsequently moved into an SPV. This might be regulatory arbitrage but it might be a socially efficient outcome meant to move assets and liabilities out of the banking system. Market segmentation: ...


5

For any country that issues its own currency, having a sovereign debt in its own currency is a choice. It can always be monetised. This will cause a one-off inflation episode, but it does lessen, or entirely remove, the national debt. So for all countries with sovereign debt in currencies they themselves issue, then no amount of national debt is ...


5

The Treasury continuously issues new debt, and retires matured issues. (This is called “rolling over debt.”) The Treasury has no right to pay debt off early (“refinance”). The closest thing that can be done is to repurchase debt. The Federal Reserve - whose common equity is owned by the Treasury - is repurchasing debt during “quantitative easing” operations.


5

Banking is confusing, and a lot of explanations apparently make things worse. In this case, ignore whatever you read, and go back to first principles. By definition: balance sheets must balance. Assets have to be matched by liabilities or equity. However, one defining characteristic of banks is that they have a small percentage of their balance sheets as ...


4

It appears that the OP confuses money with property rights A) It writes "deposits owned by the bank" which is simply wrong, since deposits are liquid assets belonging to the persons that deposited them. The bank leases the funds from them and then sublets them to the debtors. B) Looking also at an OP's comment to another answer, indeed the bank may ...


4

Countries don't wage war, Governments do. GDP is the economic production of a country, which is usually much larger than what the government has as available annual income. Historically government expenditure in the US has amounted to ~20% of GDP since 1940 (and was lower than that previously). (Source) In general, if a government needs to spend more on a ...


4

Every country has a trade balance, which is defined as exports minus imports. The United States is a typical observing state, which means their imports are higher than their exports. I do not know the current numbers but USD 1m of imports and USD 600k might be right. In this sense you import USD 400k than you export. Now as you already pointed out you have ...


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