Economics Questions

Re: "Buying" Debt

Groucho — Tue, 21 Jun 2011 01:54:04 GMT

Thanks, Smiling Dave. That is much easier to understand than when it is called "buying debt." Appreciate it.

Re: "Buying" Debt

Smiling Dave — Sun, 19 Jun 2011 15:25:14 GMT

It's pretty simple. You've heard of buying bonds, right? A bond is an IOU. Buying a bond is buying debt.

To elaborate: Say Mr Borrower borrows money from Mr Lender. He gives Mr Lender a piece of paper saying IOU $1,000. The IOU is a bond.

For convenience the IOU often says "I will pay whoever presents this piece of paper the sum of $1,000 plus 5% interest", not specifying that Mr Lender is to get the money. This makes it easy for Mr Lender to sell the IOU [=the right to demand $1,000 plus interest from Mr Borrower] to someone else.

The Fed buys Treasury bonds. Meaning the Treasury prints up an IOU called a treasury bond. Thus the treasury is Mr Borrower. The Fed will give money for it. They are Mr Lender. They have bought a bond, i.e. they have bought a debt.

Re: "Buying" Debt

Em_ptySkin — Sun, 19 Jun 2011 04:37:21 GMT

"buying" debt is just a euphemism for credit or borrowing.

Re: "Buying" Debt

Isaac "Izzy" Marmolejo — Sun, 19 Jun 2011 00:25:44 GMT

Josh,

yes, so you no longer owe Visa anything, since they are paid off. But now you owe Mastercard...

Re: "Buying" Debt

Gero — Sat, 18 Jun 2011 19:43:30 GMT

The Bureau of the Public Debt: “Our job is to borrow the money needed to operate the federal government and to account for the resulting debt. In a nutshell, we borrow by selling Treasury bills, notes, and bonds, as well as U.S. Savings Bonds; we pay interest to investors; and, when the time comes to pay back the loans, we redeem investors' securities. Every time we borrow or pay back money, it affects the outstanding debt of the United States.”

Re: "Buying" Debt

Groucho — Sat, 18 Jun 2011 19:37:48 GMT

Thanks for the reply. So it's like paying off the Visa with the Mastercard? In this context, Mastercard (or "B" in your example) has "bought" the debt from Visa (A)?

Re: "Buying" Debt

Isaac "Izzy" Marmolejo — Sat, 18 Jun 2011 18:04:56 GMT

Its kinda like buying debt with a credit card... lets say you owe $5,000 to A... You can pay off the debt by going to B and asking for the $5000 in order to pay A, B is willing to do it, but asks for interest... So A is paid off, but now you owe B $5000 plus whatever the interest is... all in all though, you did not solve your debt situation because you just made the amount owed to someone larger but you just extended the time of payment...

"Buying" Debt

Groucho — Sat, 18 Jun 2011 17:43:49 GMT

I'm new to economic study, and one thing I am having trouble wrapping my brain around is the concept of "buying" debt (i.e. the Fed "buys" government debt). For some reason I am confused by the terminology. How does this work? Does the purchaser of debt then become the debtor? It sounds that way, but I know that can't be right, since who would spend money in order to owe still more money? Could someone please help me gain a correct understanding of this? Many thanks.