Debt

Debt is that which is owed.

In financial terms in the modern world, people or companies often enter into agreements to borrow a sum of money and pay it back with interest over time. At any time, the amount still to be repaid is known as debt. The debt is subject to interest, and so it is possible for the debt to increase through time if it is not repaid fastenough. Debt is normally denominated in a particular monetary currency, and so changes in the valuation of that currency can change the effective size of the debt. This can happen due to inflation or deflation, so it can happen even though the borrower and the lender are using the same currency.

Such lendings are often termed "risk free" or "low risk" when lent to stable financial entities such as large companies or governments. This is because the debt and interest are highly likely to be repaid. However, if the value of a currency has changed in the meantime, the purchasing power of the money repaid may vary considerably from that which was expected at the commencement of the loan. So from a practical investment point of view, there is still considerable risk attached to "risk free" or "low risk" lendings, even though in terms of the amount of a currency that will be returned there may not be.

Such properties of debt have been blamed for exacerbating economic problems. For exmaple, during the onset of the Great Depression there was deflation, which effectively made debt throughout society grow. This resulted in more bankruptcies and social problems than otherwise might have been the case.

Alternative borrowing and repayment arrangements linked to inflation indexed units of account are possible and are used in some countries. It is also possible for some organisations to enter into alternative types of borrowing and repayment arrangements which can not result in bankruptcy. For example, companies can sometimes convert debt that they owe into equity in themselves. In this case, the lender hopes to regain something equivalent to the debt and interest in the form of dividends and capital gains of the borrower. Once debt is converted in this way, it is no longer called debt.

Similar arrangements could exist for individuals in that they could agree to repay a percentage of their wages for a set amount of time in return for a sum of money borrowed now. But, the lender would need to evaluate the future earning capacity of the borrower, and be able to track how much they do in fact earn during the "repayment period". Typically, only the Government can track earnings in such a way. It is possible to view taxes as such a form of repayment in return for the cost of government services "lent" to citizens, for example education when the citizen was young, health services, or protection from crime and violence. Such views form the basis of some interpretations of the social contract idea between governements and citizens.