8 Mart 2009 Pazar

Financial Paradox: Creditors and Lenders


I wish to clear two possible points of confusion in the world of finance: the distinction between a creditor and a lender. The distinction between a creditor and a lender, or between a debtor and borrower, should be borne clearly in mind of financial academics and other professionals that interested in the financial world.
The word "creditor" and "debtor" refer to what has happened in the past, e.g. a creditor being a nation that has lent in the past, whereas a debtor a nation that has borrowed in the past. Another example, inflation transfers wealth from net monetary creditor to net monetary debtors; creditors lose wealth, debtors gain wealth under unanticipated inflation. That is to say: inflation produces a gain in wealth for net monetary debtors at the expense of net monetary creditors. So, the act of borrowing does not imply gain during inflation.

Lending and borrowing, on the other hand, refer to what is happening at present. Unfortunately, the distinction is not always made clear; indeed, it was found convenient to talk of "debtor" and "creditor" when "borrowers" and "lenders" was meant. However, it is a real distinction, and not merely a verbal nicety, and in any strict discussions of the subject the distinction should be observed. A lender is usually a creditor and a creditor a lender, but by no means always.
Second point of confusion should be cleared up.

Lending must be taken to include "repaying debt", and similarly "borrowing" must be taken to include "drawing on capital". Repaying debt is of course a different thing from lending, but the inclusion of both under one head may be excused on two grounds. First, both have the same effect on the Balance Sheet, both lead to an outflow of capital, and both increase assets relative to liabilities (either by increasing assets or by diminishing liabilities). Second, it is impossible in practice to distinguish them. Similarly, borrowing and drawing on capital have the same effect and are practically indistinguishable.

The debtor-lender could win equal justice which could be called "debtor-repayers". Similarly, creditors-borrowers would frequently more appropriately called "creditor-drawers on capital".