Every single bankruptcy in history, has come down to a battle between debtors and lenders. In the end, whatever other issues of accounting may be involved, the arbitrator has had to make the choice of favoring the people who lent the money, or the people who borrowed. The goal of most honest arbitrators is that both parties walk away unhappy, on the theory that they have both then suffered equally. But the more complicated the settlement, the less likely this is.
I was thinking about this because of the dramatic turn in governance that has been demonstrated by team Trump. Our polarized polity can be thought of as a debtor philosophy versus a creditor philosophy. Or for shorthand, those that believe morality is defined by saving, and those that define their morality by spending.
The biggest holder of US Federal (and state) debt, the lenders, are the US citizenry. It’s in your pension, your 401K, your insurance companies and your banks. Your E-Trade account might not have Treasuries in it, but it won’t matter much to you if the account is frozen because E-Trade does. Social Security is a Federal program and holds a great deal of Treasury debt. But the system is no longer solvent so why they bother is more accounting trick than actual assets.
But the biggest borrower is the US citizenry as well. Our taxes will theoretically pay the entire 19 Trillion in outstanding debt, and the 200 Trillion in debt that our current laws and policies will force the government to take on over the next 20 years. This may change of course, but that's the state of things today. And our culture has no interest in paying higher taxes for less in service - and the current levels are only maintained through constantly increasing the debt.
In an additional bit of irony, the ultimate arbitrator of a US bankruptcy would inevitably be the US government. Only the authority of the US military could possibly force the parties involved to act on the outcomes.
So when I ask the question of who would be favored, the debtor or the creditor, it’s really a question of philosophy and governance - something that is downstream of our culture. What general policy direction will the government choose – one that favors debtors, or one that favors creditors? It depends greatly on what we demand of them. And if you think that points to a straightforward city mouse – country mouse dichotomy, I think you’re wrong there too.
While the cities in America are horribly mismanaged by the Democrats who unilaterally control them, they are also the source (on average) of a much higher proportion of the tax revenue used to theoretically pay the debt. Deep blue states like New Jersey and Connecticut are net payers to the US Federal Government in spite of their “debtor” philosophy of local governance, and states with more rural area like Texas and Kansas are net receivers of Federal spending, in spite of their “creditor” culture.
So who get’s what asset at what time, and who has to learn to live without is an interesting question, with no easy answer. It’s a question that get’s to where our culture is and how well our politicians can read the tea leaves on where our culture is likely to go in the future. As the culture changes, so too changes the likely outcomes.
With that said, I think you can make an argument that public programs like social security and the large public pensions are more likely to be supported at some level, than private pensions and capital investors like Hedge Funds, Banks, and Insurance companies. Overseas investors of course, are all at an even higher risk regardless of their purpose.
The opposing argument is that while there is little the Federal government can do to a private institution demanding payment if that institution also represents a strategic economic facilitator (like a too big to fail bank), they very much can do something about the management of public investment plans like social security or a public pension. And in the case of that bank, whether it seems to be a public or private institution will be a major question of culture more than law when the time comes as well. It's already by no means a clear question.
So who gets what from who? Who has to learn to live with writedowns, and reduced payouts while others are paid more completely? It will come down to juice. And the juice is flowing in Washington pretty rapidly lately. Our culture is on the brink of the biggest change in 50 years, and we may very well see a new political coalition of realists (rather than equalist fantasists) take hold.
Hopefully this question is keeping someone who is more informed than I am awake at night.