Excellent points, crmorcom. I certainly agree that the obligations of sovereigns look quantitatively different from the obligations of corporate entities, but it's an interesting mixed bag of differences. On the one hand, governments can more readily and unilaterally rewrite their "contracts" with the citizenry than can a company unilaterally rewrite it's contracts to customers, suppliers, retirees, etc. Governments enjoy fewer legal constraints than do companies because governments write, execute, and adjudicate the laws. On the other hand, governments, especially democracies, do face the pressures from voters that create some constraints that companies don't face. Can politicians in the Western democracies cut retiree benefits and win re-election? What would companies look like if every customer could directly vote among competing candidates for CEO and the board?Moreover, it would seem that governments can raise revenues with less adverse impacts than can companies. The switching costs for a company's customers are generally less than the switching costs for a country's citizens. Companies have more need to be cost competitive than do countries. On the other hand, the rich have the lowest switching costs and most Western governments seem to be increasing their reliance on the wealthy for tax revenues.There's a third criterion distinguishing "debty" vs. "cash-flow-y" financial phenomena: how does the creditor (i.e, the citizen) account for the future cashflow/obligation? To the extent that creditors tally the obligation as a real or virtual asset (i.e., behave as if the asset exists), then the thing is more like a debt. Here, too, the evidence seems to be mixed. Polls show that some expect to depend on government benefits whilst many others expect diminished retirement benefits. Similarly, the savings behaviours of U.S. citizens suggest that most will be relying on government benefits for their retirement. And if enough citizens (or their close family members) depend on government benefits, then how will they vote?But rather than get bogged down in the semantics of government obligations as formal debts, other liabilities, or mere cashflow phenomena, I think what we really want to understand is the economic futures of the US and EU. To the extent that voters demand that politicians make unsustainable promises (however we label those promises for accounting purposes), then the economies of the US et al are in for a very rough future. And if a government "defaults" on its promises to provide retiree benefits, then I suspect a increasing number of retirees will go bankrupt (which is exactly what happens to creditors during a debt default). In these various regards, government programs have some very debt-like features even if they do not meet the GAAP definition of debt.
Last edited by Traden4Alpha
on October 4th, 2011, 10:00 pm, edited 1 time in total.