Simple Debt Research Articles

A Simple Physics-Based Model of Growth-Based Economies Dependent on a Finite Resource Base

Mainstream economics describes virtual wealth with theory that is at odds with the physical laws that govern a nation’s physical resources. This confusion fundamentally prevents the realization of “sustainable” economies. The relation between debt and the metabolism of a country (measured by GDP or power consumption) appears to follow a diffusion relationship, in which debt encodes the temporal evolution of an economic potential. Debt enables the production of resources and the realization of a country’s economic wealth potential (the sum of its environmental, geological, and societal endowments, among others). Any economic scheme dependent on finite stocks of free energy for growth must eventually collapse, and as such cannot be considered sustainable. Our simple debt–diffusion model is shown to closely match the trajectories of 44 different economies.

Optimal banking with delegated monitoring

We propose a model of financial intermediation based on delegated monitoring, where firms' returns are private information that lenders can ascertain through costly state verification. Our model has two key features: lenders cannot commit to their verification strategies and there are aggregate shocks. Simple debt contracts are Pareto optimal with or without intermediation. We show that the benefits of intermediation can be limited by financial instability in the presence of aggregate shocks. However, a well-designed resolution mechanism ensures the Pareto optimality of financial intermediation, and a bail-out policy can restore financial stability.

Summary Proof of Postponement of Debt Payment Obligations Through Act Number 37 of 2004 (Study of Decision Number 7/PDT.SUS-PKPU/2022/PN NIAGA MEDAN)

<p>Debt is a liability that arises through an agreement made between a debtor and a creditor. Debt is used as a basis for bankruptcy or for submitting a delay in payment of the debtor's debt. Summary Proof of Bankruptcy and Postponement of Debt Payment Obligations (PKPU) has actually been regulated in Article 8 paragraph (4) of Law Number 37 of 2004 and strengthened by Supreme Court Decision (MA) No.109/KMA/SK/IV/2020 concerning "Enforcement of the Handbook for Settlement of Bankruptcy Cases and PKPU". Summary Proof can be a reference for the Panel of Judges in granting PKPU applications by debtors or creditors to the Commercial Court. The PKPU application submitted through Decision Number 7/Pdt.Sus-PKPU/2022/PN Niaga was rejected by the Panel of Judges because the Panel of Judges considered that the non-fulfillment of the 'simple debt' requirement that had to be fulfilled was one of the burdens of proof in the application for PKPU.</p>

ASSESSMENT OF SPECIFIC PERFORMANCE CONCEPT IN TERMS OF EXECUTION PROPERTIES FOR THE DEBTOR’S DEFAULT

Borçlu temerrüdü ile ilgili monografik eserler göz önünde bulundurulduğunda hem konunun önemi hem de derinliği çok net ortaya çıkmaktadır. Mesele basit bir borca aykırılık halinin ötesinde özellikle karşılıklı borç yükleyen sözleşmelerde çok yönlü sorunları ve tartışmaları da içinde barındırır. Zira bir kere borçlu temerrüdü gerçekleştiğinde artık alacaklının önüne çıkabilecek tek engel sadece borçlunun içinde bulunduğu durum ve koşullar değil; aynı zamanda taraflara ait yükümlülükler ile aynen ifaya konu edimin özellikleridir. Her ne kadar borçlu temerrüdünde gecikmiş olan aynen ifa talebi, temerrüde ait bir yaptırımdan ziyade, alacaklının sözleşmeden kaynaklanan bir hakkının ifadesi olsa da karşılıklı borç yükleyen sözleşmelerin özellikleri alacaklının asli talebini oluşturan aynen ifaya konu edime göre ayrıca değerlendirilmelidir. Buna göre aynen ifanın henüz borca aykırılık gerçekleşmeden yani borçlu temerrüde düşmeden önce kararlaştırılmış edime uygunluğu esastır. Edimin ifa ikameleri ile karşılanması, kısmi ifanın gerçekleşmesi, edim fiili veya edim sonucunun kararlaştırılması, edimin olumlu veya olumsuz edim olması gibi ihtimallerde ise aynen ifanın kendine özgü sonuçlarının doğması kaçınılmazdır.

What could possibly go wrong? Predictable misallocation in simple debt repayment experiments

How do borrowers repay their debts? In two simple debt repayment experiments, we elicit different types of severe deviations from optimal, i.e. debt minimizing, repayment decisions. We show how these deviations can be triggered using supposedly irrelevant information and find evidence for a novel heuristic, the “Cuckoo Fallacy”, which is based on the amount of new debt rather than the interest rate. We also demonstrate that simple framing can decrease repayment misallocation, nudging borrowers to more optimal behavior. Our results inform scholars and policy makers on how to improve household’s financial decisions.

A needs assessment: Developing a non formal economic education framework to improve economic management capabilities and earning activities of housewives credit institutions customers

Debt will provide economic benefits if it is used for productive things and the debtor have a good plan to repay. Many of the women in the village of Baleturi are in debt, but most of the women who are in debt do not use the money for productive activities. As a result, they decide to take on new debts in order to pay off old debts. The purpose of this study is to find out what is needed (needs assessment) by women who are in debt so that they can use debt for productive things. The design of this research is descriptive qualitative by using interviews and in-depth observations to obtain the necessary data. The results of the study found that most had plans to pay in installments with the income they got every month but most of the plans did not go well because expenses exceeded income. The only way out that the housewives take is to apply for a new debt (robbing Peter to pay Paul). From this side, women who are in debt need simple debt management skills and simple financial management according to their respective incomes. They also need a series of productive activities from planning to execution that are simple and according to their abilities to be free from debt bondage. Productive activities that are able to be carried out by Baleturi women are planting vegetables by utilizing the yard and culinary production.

Uwarunkowania i wyzwania kreacji safe assets – szczególna rola długu publicznego

Przedmiot badań: Aktywa bezpieczne (safe assets) są definiowane na różne sposoby, w zależ­ności od ich atrybutów i funkcji. Najczęściej przyjmuje się, że są to płynne instrumenty finanso­we, głównie dłużne, które gwarantują inwestorom zachowanie wartości w trakcie niekorzystnych zjawisk gospodarczych. Podkreśla się, że dług publiczny ze względu na jego cechy charaktery­styczne, najlepiej może wypełnić tę funkcję. Jednakże, ze względu na oddziaływanie czynników popytowych i podażowych, w gospodarce światowej powstaje problem niedoboru aktywów bez­piecznych. Możliwość uzupełniania podaży jest ograniczona zdolnością głównego globalnego dostawcy aktywów bezpiecznych – USA do zwiększania skali długu publicznego.
 Cel badawczy: Celem artykułu jest odpowiedź na kluczowe pytanie, jak dostarczać gospodarce globalnej wymaganą ilość aktywów bezpiecznych, zachowując stabilność zadłużenia publiczne­go emitentów oraz wymagany poziom bezpieczeństwa. 1
 Metoda badawcza: Artykuł stanowi syntezę studiów teoretycznych podejmowanych w litera­turze światowej i jednocześnie próbę wprowadzenia do polskiej literatury zakresu pojęciowego związanego z aktywami bezpiecznymi. Rozważania teoretyczne opierają się na założeniu, że dług publiczny jest kluczowym czynnikiem determinującym wielkość ich emisji. W konsekwencji, w artykule wyodrębniono zestaw ekonomicznych i pozaekonomicznych czynników kreacji pu­blicznych aktywów bezpiecznych. Na podstawie analizy opisowej wskaźników makroekonomicznych (fiskalnych) podjęto ocenę zdolności emitentów walut rezerwowych, w tym głównie USA, do dostarczania safe assets.
 Wyniki: Wyniki badań pozwalają wyciągnąć trzy kluczowe wnioski. Po pierwsze, w procesach kreacji safe assets, ze względu na ich specyficzne funkcje i atrybuty, dominującą rolę odgrywa sektor publiczny. Z tego powodu głównymi dostawcami safe assets są kraje emitujące waluty rezerwowe, w szczególności USA, ze względu na ich monopolistyczną pozycję w międzynaro­dowym systemie walutowym. Po drugie, potencjał tych krajów do emisji aktywów bezpiecznych jest ograniczony. Świadczą o tym zarówno rozważania teoretyczne (krzywa Laffera dla safe as­sets, dylemat Triffina), jak i rosnące poziomy zadłużenia publicznego. Po trzecie, dla utrzymania globalnej stabilności finansowej, konieczne jest uzupełnienie puli aktywów bezpiecznych. Poten­cjalnie rolę tę mogłyby odgrywać Chiny i UGiW.

What Could Possibly Go Wrong? Predictable Misallocation in Simple Debt Repayment Experiments

How do people repay debt? In a simple debt repayment experiment we provide subjects with two credit cards with different interest rates and levels of debt that are to be repaid. From a rational choice perspective, this is arguably one of the simplest financial decisions. Nevertheless, we observe severe deviations from optimal, i.e. debt minimizing, repayment decisions with one particularly persistent type of misallocation that has not been found before. In consecutive experiments we show that this and further fallacies are predictable so that behavior can be steered towards more efficient repayment decisions.

Public debt and fiscal sustainability: the cyclically adjusted balance in the case of Lebanon

ABSTRACT Lebanon’s high debt-to-GDP ratio and persistent overall budget deficit expose the entire financial system to vulnerability. Unless the country generates enough revenue to meet its gross financing needs, the prospect of borrowing more remains strong. Given the complexity of the Lebanese economy and debt structure, the formulation of fiscal and monetary policy is difficult and costly. Hence, policymakers are continuously confronted with difficult choices and must select the choice that is the least destructive. The choice between short-term economic stability and medium-term fiscal sustainability is a clear example of the dilemmas that confront policymakers. In addition, procyclicality and its repercussions on economic growth and the lack of responses to fiscal needs are matters of significant importance for public debt and fiscal sustainability. Hence, this study provides an in-depth analysis of the difficulties facing the Lebanese economy as it tries to sustain its public debt and the overall fiscal deficit. The study calculates the cyclically adjusted balance to analyze the appropriateness of fiscal policy and to assess the role of the automatic stabilizers. Additionally, the study employs a multivariate vector autoregression to forecast the variables in the simple debt model and to identify the impulses needed from various endogenous shocks. The derived results demonstrate that fiscal policy is predominately procyclical, that policymakers risked short-term economic stability for the sake of medium-term fiscal sustainability, and that unless the government adjusts its fiscal behavior, triggers automatic stabilizers, and negotiates a better deal with resident lenders, the economy will further deteriorate.

Liquidity Choice and Misallocation of Credit

This paper studies a novel type of misallocation of credit between investments of varying liquidity. One type of investment is more liquid, i.e., its return is more pledgeable, and the other is more productive. Low liquidities of both investment types imply that the allocation of credit is constrained inefficient and that there is overinvestment in the liquid type. Constrained inefficient equilibria feature non-positive, i.e., one less than or equal the economy’s growth rate, and yet too high interest rate, too much investment and too little consumption. Financial development can reduce long-term welfare and output in a constrained inefficient equilibrium if it raises the liquidity of the liquid type. I show a maximum liquid asset ratio or a simple debt tax can achieve constrained efficiency. Introducing government bonds can make Pareto improvement whenever it does not raise the interest rate.

Liquidity Choice and Misallocation of Credit

This paper studies a novel type of misallocation of credit between investments of varying liquidity. One type of investment is more liquid, i.e., its return is more pledgeable, and the other is more productive. Low liquidities of both investment types imply that the allocation of credit is constrained inefficient and that there is overinvestment in the liquid type. Constrained inefficient equilibria feature non-positive, i.e., one less than or equal the economy’s growth rate, and yet too high interest rate, too much investment and too little consumption. Financial development can reduce long-term welfare and output in a constrained inefficient equilibrium if it raises the liquidity of the liquid type. I show a maximum liquid asset ratio or a simple debt tax can achieve constrained efficiency. Introducing government bonds can make Pareto improvement whenever it does not raise the interest rate.

DEBT STABILIZATION IN THE PRESENCE OF ENDOGENOUS RISK PREMIA: A DYNAMIC GAME APPROACH

This paper focuses on the possibility that financial markets require risk premia on holding sovereign debt of countries that appear vulnerable from a fiscal sustainability perspective. Both the level of debt as well as the rate of change of debt are assumed to impact on the risk premium. We analyze the impact of such an endogenous risk premium in a simple debt game between a monetary and a fiscal player, as introduced by [Tabellini (1986) Journal of Economic Dynamics and Control 10, 427–442]. The risk premium term adds a nonlinearity to the linear model in case risk premia are absent. We analyze outcomes in case of noncooperative open-loop Nash strategies and in case of cooperative strategies and consider the workings of the risk premium as a market-based disciplining device (in case of high debt) and adjustment rewarding device (in case of a declining debt trajectory).

The Safe Assets Shortage Conundrum

A safe asset is a simple debt instrument that is expected to preserve its value during adverse systemic events. The supply of safe assets, private and public, has historically been concentrated in a small number of advanced economies, most prominently the United States. Over the last few decades, with minor cyclical interruptions, the supply of safe assets has not kept up with global demand. The reason is straightforward: the collective growth rate of the advanced economies that produce safe assets has been lower than the world's growth rate, which has been driven disproportionately by the high growth rate of high-saving emerging economies such as China. The signature of this growing shortage is a steady increase in the price of safe assets; equivalently, global safe interest rates must decline, as has been the case since the 1980s. The early literature, brought to light by Ben Bernanke's famous “savings glut” speech of 2005, focused on a general shortage of assets without isolating its safe asset component. The distinction, however, has become increasingly important over time, particularly in the aftermath of the subprime mortgage crisis and its sequels. We begin by describing the main facts and macroeconomic implications of safe asset shortages. Faced with such a structural conundrum, what are the likely short- to medium-term escape valves? We analyze four of them, each with its own macroeconomic and financial trade-offs.

Is the third Greek Memoranda of Understanding and Loan Agreement of August 2015 odious?

PurposeThe purpose of this study is to examine the odious debt concept in Greece. In Greece, the odious debt concept received high attention during recent financial crisis and Greek or Hellenic Parliament decided to establish a Special Committee.Design/methodology/approachThe Greek Parliament Truth Committee on Public Debt investigated the public debt in Greece, and the main findings are: increase of debt was related to the growth in interest payments, high public spending in defence expenditures associated with corruption scandals, falsification of public deficit and debt statistical data and illicit capital outflows and adopting the euro led to a drastic increase in private debt.FindingsBased on above the third Memoranda of Understanding (MoU) and the August 2015 loan agreement, according to Greek Parliament Truth Committee on Public Debt are illegal, illegitimate and odious because they fail to recognize the odious character of Greece’s existing debt, and the nature of the instruments by which this debt was financed from 2010 until early 2015. The Third MoU and the August 2015 loan agreement violate the fundamental human rights of the Greek people (both civil and political as well as socio-economic rights) as set out in the Greek Constitution and under international law (treaty-based and customary).Research limitations/implicationsOn the other side of results, Greece was a democratic regime during the time it contracted the vast majority of its loans and membership into the Eurozone, which benefitted country by gaining the highly low interest rates that euro currency involved. Also, substantial borrowing for Greece spent directly on the people via social welfare and public sector wages and infrastructure development.Practical implicationsTherefore, Greece, instead of the odious debt doctrine, should resort to other debt solutions such as simple debt repayment, restructuring or “haircut” of the debt (principal and interest) or declare bankruptcy without invoking the odious debt doctrine. Although this recourse avoids the dangerous precedent-setting risks of the odious debt doctrine, it also involves numerous other complexities and policy problems because with default, the banking system would collapse.Originality/valueIt is the first study examining the topic of odious public debt in Greece.

Is Operating Flexibility Harmful Under Debt?

We study the inefficiencies stemming from a firm’s operating flexibility under debt. We find that flexibility in replenishing or liquidating inventory, by providing risk-shifting incentives, could lead to borrowing costs that erase more than one-third of the firm’s value. In this context, we examine the effectiveness of practical and widely used covenants in restoring firm value by limiting such risk-shifting behavior. We find that simple financial covenants can fully restore value for a firm that possesses a midseason inventory liquidation option. In the presence of added flexibility in replenishing or partially liquidating inventory, financial covenants fail, but simple borrowing base covenants successfully restore firm value. Explicitly characterizing optimal covenant tightness for all these cases, we find that better market conditions, such as lower inventory depreciation rate, higher gross margins, or increased product demand, are typically associated with tighter covenants. Our results suggest that inventory-heavy firms can reap the full benefits of additional operating flexibility, irrespective of their leverage, by entering simple debt contracts of the type commonly employed in practice. For such contracts to be effective, however, firms with enhanced flexibility and/or operating in better markets must also be willing to abide by more and/or tighter covenants. This paper was accepted by Serguei Netessine, operations management.

Robust open‐loop Nash equilibria in the noncooperative LQ game revisited

SummaryThis paper reconsiders existence of worst‐case Nash equilibria in noncooperative multi‐player differential games, this, within an open‐loop information structure. We show that these equilibria can be obtained by determining the open‐loop Nash equilibria of an associated differential game with an additional initial state constraint. For the special case of linear‐quadratic differential games, we derive both necessary and sufficient conditions for solvability of the finite planning horizon problem. In particular, we demonstrate that, unlike in the standard linear‐quadratic differential game setting, uniqueness of equilibria may fail to hold. A both necessary and sufficient condition under which there is a unique equilibrium is provided. A sufficient existence condition for a unique equilibrium is derived in terms of a Riccati differential equation. Consequences for control policies are demonstrated in a simple debt stabilization game. © 2016 The Authors. Optimal Control Applications and Methods published by John Wiley & Sons, Ltd.

Interdisciplinary Analysis of Luhmann’s Sociological Theory on the Euro-Crisis

ABSTRACT. This paper establishes a unique linkage between economic and sociological theories. I study the root causes of the euro crisis from both perspectives. I find that resolving the euro crisis requires economic and sociological insights, particularly in respect to the design of European institutions, rules, and regulations. I develop a new paradigm in attempt to tackle the euro crisis. This paper demonstrates the importance of an interdisciplinary dialogue and how this may safeguard the future of the Economic and Monetary Union.Keywords: Euro-Crisis, Luhmann's Social Systems Theory, Economics.JEL Classification : G12; E65; C58IntroductionThe ongoing 'euro crisis' is often seen as an economic issue and referred to as the European sovereign debt crisis. Admittedly, a comprehensive economic analysis demonstrates that the euro crisis has several origins and is not just a simple debt crisis (Lane, 2012). There are multiple root causes and vulnerabilities, particularly the flawed European economic and fiscal governance (Herzog, 2013). However, as I establish in this paper, the euro crisis has a firm sociological underpinning at the same time. According to Luhmann's 'Social Systems Theory', there is a fundamental problem in functional systems, such as in the Economic and Monetary Union (EMU). In other words, Europe is facing a social-systems problem rather than just an economic crisis. This insight is intuitive under the recognition that the euro crisis is not merely a macroeconomic and monetary issue, and thus, as I will show, relates also to flawed functional systems as studied in sociology.The fundamental dynamics of states, institutions, and humans is predisposed to both group interactions and incentives. Sociological theory studies those group patterns and behaviours and thus do have an impact to resolve the euro crisis in the real world. Economic theory on the other hand lacks a rigorous discussion of group interactions because this is too sophisticated to be subsumed under the assumption of the methodological individualism a la Max Weber (1929).I find that Luhmann's approach precisely reveals this insight, especially in respect to the systemic effects of the macro-economy. The constructivist idea demonstrates - the repeatedly unconnected - linkages between the institutional (legal), economic, and political system. Thus, this interdisciplinary study of the economic and sociological origins of the European sovereign debt crisis appears promising. Indeed any policy recommendation, which tackles the existing flaws in fiscal and economic governance in Europe, requires a thorough understanding of both spheres.Section 2 starts with the economic analysis of the root causes and implications. In section 3, I utilize Luhmann's social systems theory to obtain a new perspective on the euro crisis. Finally, I compare insights and implications of both scientific perspectives, and summarize the policy recommendations in section 4. Section 5 concludes the paper.1. Economic PerspectiveTo make this paper comprehensible to an interdisciplinary community, I shall briefly explain the necessary economic theory and mainstream arguments about the root causes of the euro crisis in this section. There are already excellent overview articles on the economic root causes by Lane (2012), Arghyrou and Kontonikas (2012), Sachverstandigenrat (2012), De Grauwe and Ji (2013) and Geithner (2014).There is no doubt that the Economic and Monetary Union (EMU) has been in an economic and political crisis since 2010. The first fundamental problem is the current account imbalance across the macro-economy of the euro area member states (Herzog, 2012).Secondly the European institutional structure is unsuitable to tackle this issue. There is a consensus that fiscal and economic governance is a prerequisite for a successful and effective monetary union (Escolano et al., 2012) and this has been identified in economic literature long ago (Beetsma and Bovernberg, 1999; Beetsma and Uhlig, 1999). …

Country Solidarity in Sovereign Crises

When will solidarity, which emerges spontaneously from the fear of spillovers, be reinforced through contracting? The optimal pact between countries that differ substantially in their probability of distress is a simple debt contract with market financing, a borrowing cap, but no joint liability. While joint liability augments total surplus, the borrowing country cannot compensate the deep-pocket guarantor. By contrast, the optimal pact between two countries symmetrically exposed to shocks with an arbitrary correlation is a simple debt contract with joint liability, provided that shocks are sufficiently independent, spillovers sufficiently large, liquidity needs moderate, and available sanctions sufficiently tough. (JEL D86, F34, H63)

Can the Dark Side of Flexibility Be Overcome Through Covenants?

We study the relation between operating flexibility and the borrowing costs incurred by a firm financing inventory investments with debt. We find that flexibility in replenishing or liquidating inventory, by providing risk shifting incentives, could lead to borrowing costs that erase more than a third of the firm’s value. In this context, we examine the effectiveness of practical and widely used covenants in restoring firm value by limiting such risk shifting behavior. We find that simple financial covenants can fully restore value for a firm that possesses a mid-season inventory liquidation option. In the presence of added flexibility in replenishing or partially liquidating inventory, financial covenants fail, but simple borrowing base covenants successfully restore firm value. Explicitly characterizing optimal covenant tightness for all these cases, we find that better market conditions, such as lower inventory depreciation rate, higher gross margins or increased product demand, are typically associated with tighter covenants.Our results suggest that inventory-heavy firms can reap the full benefits of additional operating flexibility, irrespective of their leverage, by entering simple debt contracts of the type commonly employed in practice. For such contracts to be effective, however, firms with enhanced flexibility and/or operating in better markets must also be willing to abide by more and/or tighter covenants.

Screening and Financial Contracting in the Face of Outside Competition

This paper considers an investor who, at a cost, can acquire a signal about an entrepreneurial project's payoff. The problem for this investor is that uninformed investors can compete to provide funding and the informed investor's contract offer conveys information to the entrepreneur about the project's likely payoffs, affecting the attractiveness of the entrepreneur's uninformed funding alternatives. I determine how the investor's choices of signal quality and contracting terms are affected by project primitives. I prove that equilibrium expected payoffs in this signaling game are unique and that equilibrium strategies solve simple optimal contracting problems, showing that informed investors can use equity, and that uninformed investors compete with simple debt. Finally, I show that introducing the possibility of commitment by the informed investor alters the structure of the game, but not equilibrium payoffs.