Its real its ours and we have got to pay all debt back.
It’s more difficult to unwind debt today than in previous downturns. Distressed companies can’t easily sell assets to pay off debt amid present harsh deal-making environment. And many people owe more than their underlying assets are worth… like homeowners who owe more on their mortgages than the market value of their homes. Big banks and other financial institutions, battered and bruised from the financial crisis, don’t have accumulated enough strength or willingness to refinance all that debt.
As home prices slide, this time many high-end homeowners – like so many of their subprime counterparts before – find themselves hopelessly upside down in their mortgages. Once the value of a home falls well below the size of the mortgage against it, the homeowner loses the incentive to continue making payments. The calculation is more or less the same, whether the mortgage is $100,000 or $1,000,000.
It’s a snowball that rolls off the mountain getting bigger at every turn. Lots of big-ticket employees lost their jobs; home prices tanked and credit disappeared. When added all this up, there is an enormous mountain of pain and suffering, even in “rich” households. Big-ticket mortgages are the new sub-prime.
“For three straight months, option adjustable-rate mortgages have generated proportionally more delinquencies and foreclosures than subprime mortgages.”
Another housing-bust-cum-credit-crisis comes around the corner. Credit has disappeared from the economy thousands of businesses are discovering that they cannot survive the new ‘normal culture’ that relies on solid paychecks and savings, and NOT on credit. And so, one by one, business doors are closing and the empty commercial spaces are piling up, pushing commercial real-estate prices further down in the process. There will not be any genuine bottom in the property market until there is a bottom in the prices of commercial real estate mortgages, and that is a long while off.
Millions more consumers will freeze up as their finances go over the cliff. More bank losses will drag down even more so-called “blue chip” retirement portfolios and the impact of the consumer bust as written about before will “multiply” yet again. Millions more could lose everything.
Dan Amoss says: “when you consider that the biggest threat to the economy in 2010 is the backlog of mortgage foreclosures that have yet to work their way through the system.” – “As these homes work their way through the system, it will be another deflationary shock to the banking system.”
The world is drowning in debt and there are only two possible options:
1. A global economic depression or,
2. A very high inflation with the risk of hyperinflation.
The #2 option is the most likely one.
Because the Obama team faces a total debt obligation of US$115 trillion, while the majority of the American consumers still are in debt too. Consequently the US dollar will be further reduced in value through a process known as monetary inflation.
However America is not the only nation pursuing inflationary policies, other developed governments are printing money too, to debasing their currencies in order to stay competitive in a global market environment. In other words no country wants a strong currency so everyone is occupied with competitive currency devaluations. Certainly this massive money and debt creation is causing a severe inflationary pressure that could move into hyperinflation, which is a very scary thought.
If the Fed does not inflate away – or repay – their huge debt, the alternative will be the largest sovereign default in history. Given the ability of the Fed to print fiat money, the inflationary solution is the route they will follow.
It’s important to realize that fiat money is the worst kind of money whenever it has been used. History showed that fiat money has been a great failure. In fact, EVERY fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse of not only the currency, but of the whole economy that housed the fiat currency as well.
Inflation would certainly make debt more manageable, but it would also dilute the purchasing power of ordinary people the consumers, causing a drawn out ever-deepening depression.
Today’s monetary setting is worse than that of the last century, for at least in the earlier part of that century there was still a gold standard. Up until 1971, there was some resemblance, however weak, of an international gold standard that put up a valuable resistance to printing infinity quantities of paper money, as is the case nowadays that’s done by the feds and other central bankers around the world. For example look at Zimbabwe to understand where al this will lead.
The monetary restraints on today’s central bankers are too lenient. Hence, the threat of inflation is far more lethal. Paper monetary systems have a tendency to blow up, in what is commonly called hyperinflation. Those are not so rare, looking again at last-century experience. There is the famous German hyperinflation of 1922-23, where price inflation was 3,422% in 1922 alone and where, in January 1923, one could buy a dollar for 20,000 marks – but by early November it took 630 billion marks to buy that same dollar! The numbers are simply staggering and hard to comprehend. Yet, Hungary’s hyperinflation of 1945-46 was even more spectacular, with price inflation of 19,800% per month.
The huge un-payable debt owed by the U.S. is an invitation to repeat the German Weimar experience.
To demonstrate the devaluation of a currency in a period of hyperinflation, here a brief overview of the German marks per one U.S. dollar exchange rate during the Weimar Republik:
• April 1919: 12 marks
• November 1921: 263 marks
• January 1923: 17,000 marks
• August 1923: 4.621 million marks
• October 1923: 25.26 billion marks
• December 1923: 4.2 trillion marks.
What happens in a hyperinflation is that people start buying things, anything, and everything, desperately getting rid of their money, spending all their cash to stock up on these things that are going to cost more in the future or even tomorrow, because their money is going to be worth less every day if it isn’t spent immediately. Consequently prices rise like they were rocket-propelled in response to this increased demand. The result is that everybody who has any money that they were not able to spend is gradually bankrupted.
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