Sovereign debt - have you ever pondered what it really means?
First, let's consider typical secured debt in our daily lives. Fred wants to buy a house. The house appraises at $100,000, so the bank agrees to loan Fred $80,000 with the house held as collateral in case Fred defaults. For the time being we'll ignore the irresponsible practices of authorizing loans above true market value.
This is a form of secure debt. As long as Fred makes his payments on time he gets to call the house his and live there unencumbered by the debt he owes. However, if he loses his job or simply decides to quit paying, the bank will seize the house (which is really theirs until paid for) and kick Fred out.
We see this form of secure loan for many items, including cars, furniture and even some investments. While it is not the wisest means of acquiring goods, it is honest as long as the customer intends to pay off the loan. And, since the collateral is worth more than the amount loaned, it's a responsible investment on the part of the bank as well.
But not all loans are secure. Some are simply based on your history and promise to pay off the loan. Credit cards are an example of this sort of loan. You can take a vacation now and pay for it tomorrow. But it's impossible for the bank to repossess the vacation. Student loans fall into this category as well, but represent a system of inflation and entrapment that we won't get into here. On the other hand, at least they represent an investment in someone's ability to pay.
If someone is responsible with the insecure loans, they can be a valuable tool. However, most of us tend to abuse them after a while. One credit card gets maxed out, so we sign up for another. The next thing we know we have $50,000 - 100,000 in debt that we begin realizing that we can't pay.
While it's true that the bank should have never authorized you to borrow so much, unless some sort of fraud is involved, the fault is yours and yours alone. It's up to you to pay it off. Of course, you can default by failing to pay or through bankruptcy court. But the fact remains that you put yourself into this mess.
Most of us can accept that. We recognize the risk and accept responsibility. But what if your credit card was stolen? In fact, what if someone actually applied for several more credit cards in your name and maxed them out? Of course, you can deny it's yours. But, for the purpose of the illustration, suppose you had no recourse? You could not fight it. The courts asserted that the debt was yours and that you must pay it off. Furthermore, even if you file bankruptcy, you still must pay off the debt of the stolen credit cards. You have become a slave of debt.
The sense of injustice you're experiencing right now is none other than sovereign debt. Your government borrows and runs up a national credit card based on their promise that the tax-payers will pay off the loan, with interest.
We'll expand on this thought tomorrow.For your prosperity,
J. Keith Johnson
The Gold Informant