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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: NOW who wrote (22882)	12/5/2004 7:59:37 PM
From: Carlos Blanco	Read Replies (1) of 110194

or perhaps it might happen only after the dollar has been devalued by so much (or there has been enough inflation) that very large portions of the outstanding debt have been rendered irrelevant." what do you mean by this? large episodes of inflation (or devaluation) favor the debtors by wiping out their debt in real (not nominal) terms. that's the traditional political "cure" for too much debt. FDR did it, Nixon did it, and every single politician will do it in order to "cure" excessive debt overhangs. it is a uniquely unfair way of favoring irresponsible debtors over responsible savers. extreme simplified example: if in one year inflation causes all prices and wages to rise by 100% and your mortgage is fixed at 5%, your mortgage debt has conceptually been cut almost in half. similarly for dollar-denominated bonds owed to foreigners when the value of the dollar goes down vs. foreign currencies--as value of the dollar drops, although the dollar amount hasn't changed, the bond owners are losing corresponding portions of the original loan amount in real terms.

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