|Debt Hangs Above Us Ready To Explode!|
|Debt Has Been Transferred To Public Sector|
|Debt Defaults Equal A Transfer Of Wealth|
All debt is not created equal with the devil often buried in the details. This means the writing off of debt will not be an orderly and even process. 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.
|The US Economy Has Not Deleveraged! (click to enlarge)|
Across the globe, since 2008 the central banks and governments of the world have played a giant game of hide the debt which has resulted in increased speculation that propels the creation of leverage or carry trades that multiple risks. It also tends to move demand forward and cause an increase in the improper allocation of capital. 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 distort prices and mask deeper problems developing under the surface. Lessons from the "Financial World" can be doled out rather rapidly making it important to pay close attention, they include new terms like bank bail-ins where you can be given a very expensive "haircut" to "claw-backs" a term referring to how a deal isn't over even after its over.
As noted above, the problem of debt hangs above our heads as a Hindenburg in search of a spark. It is important to consider how this will all play out or shakedown during the next financial crisis or time of economic stress and while it is yet to be determined the ramifications remain powerful. Often unpaid debt shifts the pain or obligation to another party and transfers wealth, 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 those waiting to be paid will be massive and undeniable in coming years. Defaults will reveal their ugly side when pensions are cut, inflation edges higher, or simply by resulting in lowering our overall standard of living. The fact is some way or form the piper must be paid and that is when we will be reminded that there is no such thing as a free lunch.
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