The world is a maze of debt.? Debts layered on debts.
The Earth and its productivity is roughly the same or better than prior years.? What is the problem with the economy then?
The problem is this: there are entities that made bad loans in the past that expect to be paid back in full.? They assumed the future would be far better than it turned out to be.? There is no way that the loans will be paid back in full.? The solution is paying back at a discount, whether through compromise or insolvency.
Wait. Many of the lenders are leveraged as well, and can’t take significant losses.? Paying back at a discount will bankrupt a number of banks, which will in turn bollix the economy.
So, we have to go slow?? Does this bring us back to the problem of how one eats an elephant?? “One bite at a time.”? That is the method of Japan, leaving an over-indebted government, and reasonably indebted private sector.? But it took two decades.
Whether it is in the Euro-zone, China, or America, it would be better to let entities fail, and deal with the mess.? Yes, GDP will drop a lot, but it will rocket out of the troubles 2-3 years out, the way that Eastern Europe did post-Warsaw Pact.
Ending? the economic malaise means ending the debt overhang.? Where is the government, or set of governments willing to attack this and reduce debts economy-wide?? I know it is a tough prescription, but economies don’t work well when they are overindebted.
This sounds like one of those optimization problems you get in a calculus class, but with a lot more variables: Find the average % discount payback to lenders that gives the lowest # bankruptcies, lowest remaining indebtedness, and shortest recovery time. Oh yeah, and people (including politicians) don’t like to lose their jobs.
I suppose it’s like pulling off a bandaid- slowly maximizes time while minimizing pain; or you can just yank and be done, but you’ll likely drop a few tears. Where’s that middle point that shortens the time but doesn’t cause unbearable pain? Could Japan’s last 20 years be taken as data for a model that could predict that point? Has this been done?
David, how are you positioned, investment-wise, for what you expect to be the actual outcome, and how would you position yourself if your recommendations were actually implemented?
Abulili, I’m just a value investor. That’s what I’m best at. That’s what I do. I also have some long Treasuries and high-quality corporates.
Alex, that’s why Japan has been such a mess. Their private economy has delevered to normal, but now their government is among the most highly indebted in the world.
We could have solved these problems back in 2000-2002, but we created a housing bubble to replace the tech bubble. Now we learn that there can be too much debt.