POLITICS, PUBLIC DEBT AND DEBT MANAGEMENT
A theory of public debt must be capable of distinguishing between "private" and "public" debts, and, at the same time, be sensitive to the meaning of "debt." Governments rarely borrow with requirements to pledge security or to maintain certain debt coverage ratios. Rather, governments at all levels promise to pay out of general revenue, interest and principal to debt holders. In the case of national governments, its power to expropriate, to tax, to borrow and to print money through its control of the central bank makes governments very different from corporations or individuals.
When corporations or individuals borrow, a comprehensive security document is drawn up that requires the borrower to, for example, maintain fire insurance on the home or maintain certain debt service coverage ratios. Quite frequently security, in the form of a house, corporate assets or market securities, is required as collateral to be realized upon in the event of nonpayment. In the case of nonpayment there is a defined legal process by which realization takes place (e.g., foreclosure, Rice Order, bankruptcy proceedings).
As Emerson P. Schmidt, in his examination of private and public debts, noted: "It is not the dissimilarity between private and public debt, which is significant; rather public authority backed by the taxing and other sovereign powers can manipulate purchasing power and resources in ways which are not open to private enterprise." 1 Another key difference between individual or corporate bankruptcy and state "bankruptcy" is that there is really no formal court process whereby the state would be compelled to pay interest and principal. 2 The process of curing a default is a very political one.
Equally significant is the role that public debt comes to play in the capital markets. Public debt, issued by the national government, is the foundation for all developed capital markets. As the primary source of collateral for securities lending transactions, futures and options markets, investment portfolios or for the management of liquidity, government bond trading overwhelms the trading of all other instruments. 3