Friday, May 15, 2009

More good news: record high credit card defaults

No, seriously - this is actually good news. The basic problem we face is an overleveraging across all sectors of the economy and this is good news because the US consumer unequivocally needs to deleverage before a recovery can be viable. The choice has always been simple if you owe too much money: declare bankruptcy, inflate your way out of it or find a sucker to help you roll it until you can pay it off.

The inflation part is both politically and socially intractable (pop quiz: what do the AARP and the largest Communist nation in history agree on?) - the level of inflation needed to devalue our debt would start approaching historic levels. Maybe not as bad as the Weimar Republic or Zimbabwe, but significant enough to really hurt.

An equally unappetizing option would be to leverage our "exorbitant privilege" to do multi-trillion rolls over the next 30-40 years. The pitch may go well and the capital may be out there but inherently it assumes a level of self-restraint and foresight that is laughably distant from our American democracy. When we are still wasting billions on Cold War weapons, it is tough to believe that we, as a nation, will patiently and deliberately delever.

In practice, the answer will be some combination of the three options. Bankruptcy is tremendously traumatic on a personal level, not to mention the lasting effect that it has on consumer credit and the resulting waterfall effects. However, on a macro level it is good and serves a very practical purpose - bankruptcy wipes out debt, allows the economy to bounce back rather than stagnate in zombie land and punishes lenders for making stupid decisions. Some may argue that it makes debt more expensive - we would argue it more accurately prices money going forward. Which would you rather have?
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