Many people believe that debt is more-or-less equally distributed across all social classes and therefore cancels out amongst them. The example that is frequently, if totally erroneously, used is that Joe Janitor borrows money from Pete Policeman who has deposited his savings at a bank.
Unfortunately, this type of financial reality only exists in the movies - for example in "It's A Wonderful Life" with its Bailey Building and Loan Association. In the film bankers are the good guys who try to create social justice and equality by lending to one and all, while an evil slumlord is trying to bring them down.
However, "real" financial reality is much closer to a much older work of fiction: Dickens' "A Christmas Carol" and the chasm separating Ebenezer Scrooge from Bob Cratchit. That is to say, a small percentage of people (the "monied" class) hold as assets the debts of everyone else.
With this is mind, I maintain that the assumption, service and ultimate default of debt is best analyzed and understood not in terms of straight economics but as aspects of political and social science, at least where household and public debt is concerned (public debt being another form of personal debt, since it is assumed in the name of the people). Straight economics - if there ever was such a thing - is completely inadequate to help us understand the dynamics involved, particularly when debt exceeds a certain percentage of income and becomes onerous.
Most every politician and economist will forcefully say the same thing: default is equivalent to disaster. Really? Why?
If the "bottom" 90% of the people owe their debts to the "top" 10% and can no longer generate enough earned income to service them and maintain a decent lifestyle, isn't default a great benefit to them? Doesn't the destruction of debt - if properly handled, mind you - create social and economic justice for the vast majority of the people? Or should the 90% keep slicing off pounds of flesh?
Yes, default means that the top 10% will suffer a radical diminution to their accustomed living standards, but is this so bad? To paraphrase: "Where Are The Peoples' Yachts?"
So far in this crisis we have fought fire with more fire as our collective governments have forced the people to assume even more debt, purportedly to "salvage" the likes of AIG and Greece. But it isn't them who are being "saved", of course, but their creditors. How fair is that?
One of these days "the people" will wake up and realize that properly managed debt default is far and away to their advantage but I am not holding my breath. Social-political leaders and their media mouthpieces are default atavists - or, more precisely, are paid to be.
