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> The difference between corporate debt and government debt is corporate debt is backed by assets, which is not inflationary. If this were true corporations wo

by wahern 5y ago

> The difference between corporate debt and government debt is corporate debt is backed by assets, which is not inflationary. If this were true corporations would never become insolvent. The role of CDOs and CDSs in the 2008 crisis made it abundantly clear how corporate debt can be inflationary. But we knew that beforehand from previous crises in the 19th and early 20th century when unwinding corporate debt and restoring liquidity was handled (if at all) almost entirely in the smokey parlors of the private sector by titans like J. P. Morgan. See, e.g., https://en.wikipedia.org/wiki/Panic_of_1907 https://en.wikipedia.org/wiki/Panic_of_1907 More generally, see Lords of Finance (https://en.wikipedia.org/wiki/Lords_of_Finance https://en.wikipedia.org/wiki/Lords_of_Finance), an historical account of early 20th century international banking which swept up numerous history and economics awards. (It was coincidence that it was published amidst the 2008 crisis. IIRC nothing in the book mentions it except possibly a foreword.)

WalterBright 5y ago
> If this were true corporations would never become insolvent. Banks call that "risk". They still demand collateral equivalent to the value of the loan. The more the "risk" of the collateral being worth less than the value of the loan, the correspondingly less they'll loan. The Fed, on the other hand, offers no collateral at all. Also, there was zero net inflation in the US from 1800 to 1914. Endemic inflation started then, because that's when the US decided to start borrowing money without collateral (aka fiat money).
- wahern 5y ago
  The collateral the Federal government offers is the U.S. economy, which it can tax, and national assets, which it can lease or sell. From the perspective of international global finance, the U.S. Federal government is just another counterparty, albeit a very large one. The fact that the government prints its own currency doesn't change things that much in the abstract. A dollar note is just that--a promissory note, a type of negotiable instrument like a corporate bond or personal check. The U.S. government can print more notes, but a corporation can print more bonds or a shopper sign a bunch of checks. The value isn't what's on the face, but what people will give you in exchange for it. In the case of the U.S., foreign parties are still eager, perhaps too eager, to exchange automobiles and semiconductors for U.S. notes. Ditto for U.S. bonds.

by wahern 5y ago

WalterBright 5y ago

> If this were true corporations would never become insolvent. Banks call that "risk". They still demand collateral equivalent to the value of the loan. The more the "risk" of the collateral being worth less than the value of the loan, the correspondingly less they'll loan. The Fed, on the other hand, offers no collateral at all. Also, there was zero net inflation in the US from 1800 to 1914. Endemic inflation started then, because that's when the US decided to start borrowing money without collateral (aka fiat money).

wahern 5y ago
The collateral the Federal government offers is the U.S. economy, which it can tax, and national assets, which it can lease or sell. From the perspective of international global finance, the U.S. Federal government is just another counterparty, albeit a very large one. The fact that the government prints its own currency doesn't change things that much in the abstract. A dollar note is just that--a promissory note, a type of negotiable instrument like a corporate bond or personal check. The U.S. government can print more notes, but a corporation can print more bonds or a shopper sign a bunch of checks. The value isn't what's on the face, but what people will give you in exchange for it. In the case of the U.S., foreign parties are still eager, perhaps too eager, to exchange automobiles and semiconductors for U.S. notes. Ditto for U.S. bonds.