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Too Much Debt: Restructure, Default, or Devalue?

By Larry Doyle on March 31, 2009 at 8:30 AM in Economy, Sense on Cents (Larry Doyle blog), Wall Street

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 Cents‘ Thought 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?

LD

  • http://www.DailyPUMA.com Alessandro Machi

    Unsecured Credit Card Debt is around a trillion dollars in the United States. While half of the worlds wealth has allegedly been lost in the past year, this unsecured credit card debt has actually increased, making it a real drag in several ways.

    The best scenario, in my opinion, is to declare all credit card debt that is older than two years, payable interest free. This would give every debtor an short range plan to reduce debt, which would increase consumer spirit.

    http://www.DailyPUMA.com

    • http://www.DailyPUMA.com Alessandro Machi

      Unsecured Credit Card Debt is around a trillion dollars in the United States even as half of the worlds wealth has allegedly been lost in the past year.
      This means that unsecured credit card debt has actually doubled without anybody borrowing any more money. Plus, overall credit card debt has gone up as well.

      This makes the increase of unsecured debt as compared to wealth as much as a tripling!

      The best scenario, in my opinion, is to declare all credit card debt that is older than two years, payable interest free with reasonable monthly payments. This would give every debtor a short range plan to reduce debt, which would increase consumer spirit and responsible spending.

      http://www.DailyPUMA.com

      • http://www.senseoncents.com LD

        Interesting perspective…not so sure it will happen, though, as it would mean an immediate hit to the banks bottom line and the banks are already in the hole to the tune of hundreds of billions.

        Good idea, though, but I don’t think it would happen.

  • cynic

    I’ve always wondered why credit card companies are allowed to get away with adjusting interest rates upward on previously existing balances. This will probably create the same sort of catastrophe we saw with adjustable rate mortgates.

  • christian

    The gov’t does not have the biggest debt problem right now in terms of getting a recovery started…. because they still have the income to service the interest……so you are wrong when you say restructure or defaults are not going to happen …because they very well could in the different sectors that needs to restructure their debt CRE,RRE, Finance, corporate debt…etc.

    So debt needs to be written down to a level that allows income to service it or income has to come up and meet a level that can service the debt or a bit of both………..How would you think higher incomes will get into the hands of the people…..to service the debt (it sure as hell is not going to be a informal devaluation that accomplishes this in an era of high job competition and global wage arbitage)……either massive bankruptcy’s…….or a CO-ordinated ONe time Devaluation seem most likely particularly after civil unrest from a deepening depression forces something to be done