|Debt Defaults Are A Transfer Of Wealth|
|Debt Hangs Above Us Ready To Explode!|
Artificially low interest rate tend to skew all markets especially the credit and debt markets. This creates a debt explosion that extends into everything including consumer spending and the statistics surrounding their effects on the economy. A great deal of what is being seen as deflation flows from a loop being created from lower interest payments on things like autos, sadly this is a one-off and only goes to mask deeper trends developing under the surface. The fact is debt that cannot be repaid tends to be hidden away and corrupts the true worth of those owed what often amounts to non-collectable sums. Even now we are hearing calls by many people to write off and forgive student debt without any real understanding of the implications such a policy would entail.
Again, I caution those who think this writing off of debt will be an orderly and even process. By that I'm saying not all debt is created equal. One major difference is whether it is backed by assets or collateral. Many other factors affect the strength or impact of defaults. One example of this is when it becomes payable, some debt is stretched over decades while other obligations are short term and paid with a balloon payment or all at one time. Also debt is computed at different interest rates and this can affect its long-term impact. Another often forgotten issue is whom the debt is owed to and the impact default will have on their ability to honor their current and long-term obligations. I have seen several businesses forced into bankruptcy when a large customer defaults and cannot pay its bills.
It is important to consider how this will all play out or shake down, this is yet to be determined but the ramifications remain powerful. Often unpaid debt shifts the pain or obligation to another party and acts as a wealth transfer, usually this is not a voluntary act unless the note is being forgiven by the holder. I see bad debts on the rise and the effect to both the economy and the lives of many will be massive and undeniable in coming years. It will show its ugly side by pensions being cut, inflation edging higher, or simply lowering our overall standard of living. The fact is some way or form the piper must be paid and we will be reminded that there is no such thing as a free lunch.
|The Reality Is We Have Not Deleveraged!|
Several other bad things also happen such as increased speculation that propels the creation of leverage or carry trades that multiply risk. It also tends to move demand forward and cause an increase in the improper allocation of capital, both of these action have a way of causing problems that linger for years. Across the globe since 2008 the central banks and governments of the world have played a giant game of hide the debt, much of it disguised by transferring obligations from the banks and people onto the backs of their populations and into a growing pile of public debt. The problem is massive debt still hangs above our heads as a Hindenburg in search of a spark.
Footnote; This post dovetails with many of my recent writings. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged. The two article below delve into some of the things we should of learned by now and how bad debt is absorbed and fades with time.