Originally Posted by stepford
Also debt and equity have a somewhat different meaning when the debtor controls the value of currency in which the debt is denominated.
+1 ... and that was the intent of the OP. Consider the actions of the Fed, in setting interest rates.
In this article, imagine that the Federal Government is the buyer of the automobile, and at the end of the original loan term... the unpaid balance
which cannot be paid, is renegotiated, offering the debt to whatever source
may accept this negative equity. If, in real terms, that source determines that the new "loan" is safe, it has accepted "negative equity" as having value.
The accepted value is usually "paid off" with devalued dollars. The length of time for that to occur is measured by the inevitable onset of devaluation.
To extend the automobile analogy... When the entity that accepts the unpaid balance on the car cannot collect, and the car has a very depreciated value, the owner of the "equity/car" cannot recover the accepted value, and the debt becomes worthless. The entity that loaned the monies, becomes bankrupt.
Work out your own scenario. As an interesting sidelight, consider the status of Japan, which, next to the United States has the largest debt burden. (twelve trillion to the US 23 trillion). A key to the survival of that country, with a relatively low... (to the US and China), GDP.... is that the Public Debt makes up the vast relative percentage to the debt... 264% compared to the U.S. 67%
All in all, an interesting dip into what will probably become a major factor in the future US economy.