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Too Much Debt: Restructure, Default, or Devalue?

Posted by Larry Doyle on March 30, 2009 11:10 AM |

Virtually every sector in the economy is faced with the same predicament: excessive debt. Whether residential housing, commercial real estate, consumer finance, automotive, municipal finance, or Uncle Sam, the current debt service along with future debt service is overwhelming.

In my opinion, the amount of influence with your lender (creditor) is directly related to the amount of debt and the terms of that debt. Regrettably for many taxpayers, the amount of debt from residential mortgage payments along with credit card bills and other household debts are not sufficient to create much influence. For larger corporations or municipalities, the influence is greater as these entities threaten to default. Thus, we see ongoing games of “chicken” being played between debtors and creditors while debt service typically gets restructured. 

What about the largest debtor of all, that being Uncle Sam?  He can’t play the “default” card and expect the market to treat him with any degree of credibility. Thus, Uncle Sam does not have the option of restructuring or default. The only real option left to Uncle Sam is devaluation. How does that get played out? In the very manner that the Fed and Treasury are doing right now. Pump money into the system like there is no tomorrow.

What is the implication of that policy? Ultimately an informal devaluation of the currency will generate increased inflation, if not potentially hyper-inflation.

In my interview with Michael Panzner last evening on NoQuarter Radio, he projected double digit interest rates on 10 year U.S. government bonds driven by a double digit rate of inflation over the course of the next few years.  One of Sense on CentsThought Leaders, Ken Rogoff, is projecting 8-10% inflation within 3 to 5 years and states in today’s WSJ, “all the elements are in place to pull the rug out from under investors.”

The WSJ highlights the threat of inflation extensively today:

1. Inflation Is Tempting For Indebted Nations

2. Reflation and How to Exploit It

3. Dethroning the Dollar: What If?


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