Friday, July 03, 2009

We need a national cramdown

Mountain of Debt

Individuals and states are seeing the effects of too much debt on their balance sheets at a time when incomes are falling. Cash flow is being diverted more and more to support debt payments instead of savings and investment. We can not grow an economy on interest payments. Sorry Federal Imperial Government. At some point, our bondholders are going to say enough is enough, stop debasing the currency.

So, while the people are rapidly deleveraging, the Feds are rapidly levering trying to offset the drop in asset prices that threaten to bring down hundreds of banks.

What will happen at some point is a national cramdown. Bondholders will have to take their lumps, convert their debt to equity, and expect equity like returns. This is what happens in a chapter 11 bankruptcy. Current equity holders are wiped out, the bond holders are given equity claims on the remaining assets, and the debt is wiped from the slate to remove the DEBT SERVICE BURDEN. Without debt service, companies can reinvest cash flow into income producing assets instead of retiring debt.

For any chance of a strong and lasting recovery, excessive debt and the burden it places on savings and investment must be wiped out. Until then, please look at Japan's stock market for our likely future:

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