We all live in our own reality, separate from everyone else’s but just as real. In reality, a puddle is simply something to be avoided after a deluge. In another reality, that puddle contains a world of complex and intricate microorganisms interacting with their surroundings. Debt is that puddle; it is more than an inconvenience. In this article, we look at some of the principles and alternative debt realities behind debt in the modern world.
It is a myth that bartering existed before money and that civilisations relied solely on the exchanging of goods to survive. Imagine the blacksmith wants a shirt, but an iron cowbell is of no value to the tailor who can’t exchange it for bread with the baker – what then? Instead, ledgers were kept, and values were placed on the weights of commodities, foodstuffs and precious metals. History shows bartering has always existed alongside other methods of exchange. For example, in 17th-century Virginia, you could pay fines and taxes in cash or with bags of tobacco.
The Value of Money
Oil, gold and bank balances are humanity’s barometer of wealth and poverty. Gold was used as early money because its value could easily be determined by its weight. Until 1931, British banknotes could still be exchanged for gold. Nowadays, they represent a value or ‘promise to pay the bearer’ on demand. What differentiates the pound and other fiat currencies (value not tied to a physical commodity) from the likes of Bitcoin is that Bitcoin has a finite supply and is unregulated. To supply more money, the Bank of England simply prints more.
Reputation & Credibility
A company’s credit rating and value today are determined largely by financial measurements. That’s why startups enter the modern credit arena with a low rating and can expect to pay upfront or on reduced terms. The place in the society of directors has no impact on the startup’s credit score. In the Islamic Golden Age, two penniless individuals could start a business with no money but be given credit off the back of their reputations alone. Today, such gentlemen’s agreements are offered as a last resort when the financials don’t stack up.
Debt as Conditional
In the realities of commerce and Advocate Debt Recovery, debt is conditional. The seller expects payment of an agreed amount by an agreed date, and the buyer expects the goods/services provided to be of the agreed quantity and quality. Debts are quantifiable as a sum of money in exchange for something of equal value. Secured loans are conditional on not just repayment but the funds being used for the intended purpose, such as buying an asset.
Debt as a Duty
Society dictates we have a duty to suffer for our wrongdoing, whether that is a reprimand, sanction, or custodial sentence. In the Gulags of Russia and North Korea, the duty is paid through forced labour. Doing someone a favour places the receiver in your debt with a duty on them to repay the kindness in words or deeds. Parents have a duty to care for their children. Children have a duty to honour their parents. In most religions, you owe a debt to the presiding god for being born or for blessings bestowed. In previous centuries, a debt to a god or deity could be paid through human or animal sacrifice. After all, the creator of life itself has no need for money!
Debt as an Obligation
In Stockholm Syndrome, hostages inadvertently develop positive feelings towards their captors as a coping mechanism. This fosters a sense of obligation, which leads to endorsing, even aiding and abetting them. Siding with captors can also be born out of the need to survive or the innocence of blissful ignorance. To tame the grey wolf into the labrador of today, humans used food scraps as a debt repayable through protection and service. Zoo animals bred in captivity have no understanding of their wider conservation role but learn to value their keepers. Peasants in the Middle Ages rented land back from the tyrant who ceased it to ensure their protection.
World Debt – Conditional, Duty and Obligation
The International Monetary Fund (IMF) and World Bank (WB) are funded by first-world countries and their financial markets. They provide loans to low- and Middle-Income Countries (LMICs), conditional on progressing agendas such as democratisation and economic reform. Some conditions steer the LMIC’s economy towards exclusive trading with first-world nations to the point it becomes an obligation.
Making an LMIC cash flow positive takes years, if not decades, and requires continual rounds of funding. Meanwhile, the debt pile still needs servicing. Loans to feed and water a malnourished population, honourable as they are, equate to buying your own aid and don’t provide any means to repay the debt or address the root cause. Foreign borrowing for LMICs is both a blessing and a curse. There is an uncomfortable correlation between first-world former empires (Britain, Holland, etc.) financing the IMF and WB and the high proportion of former colonies receiving loans.
It seems almost counterintuitive that the poorest nations are shackled to servicing debt owed to first-world countries, ultimately lining the pockets of their already wealthy benefactors.
The Heavily Indebted Poor Countries Initiative (HIPCI) exists to relieve LMICs from the burden of unsustainable debt through writing some or all of it off. The IMF reimburses lenders, so it is a win-win outcome. To date, 36 LMICs have used the HIPCI, with Ghana doing it twice. Ghana’s debt and forgiveness cycle raises questions about the political appetite for reform and whether the loan conditions are having the desired effect.
Reality of Debt
Debt, whether it is conditional, a duty or an obligation, is found in everything from the puddles of society to the tsunami of global markets. Human history consistently shows the poorest being indebted to the richest: those who can least afford it to those who can afford it most. Insolvency may absolve the debtor of their liability at the cost of forfeiting assets and status, but it does not compensate the creditor (unless you fund the IMF or World Bank). When your debtor refuses to make payment, the relationship tilts from one of equal exchange to being held hostage to their financial predicament. That imbalance can be counteracted through debt recovery, which restores power back to the creditor in holding the debtor hostage to legal proceedings instead!