SOS The Economics of Debt Implosion

The Economics of Debt The Truth
Simple anology of debt is when you take a loan from a bank (a debt is created) and you are suppose to pay back the principal and interest within that stipulated tenure agreed by lender and borrower.

The Reality in USA

A. Genuine Mortgage Debt Implosion (Sub Prime + Prime) The average American borrow more than they can afford to pay back based on the fallacy assumptions that the property price will continue to increase infinitely. Fannie Mae and Freddie Mac - mortgage loan created about USD5.2 trillions, who knows how much is not repayable.

B. Synthetic Mortgage Debt Implosion (CDO, CLO, MGS) Basically is a second layer debt created (from mortgage and others like credit card loan, car loan, education loan) repackage and sold to financial institutions based on rating agency. Synthetic debt does not has physical securities like you can foreclose a house or building.

C. Betting Debt Implosion (CDS) The third type of debt is after the creation of synthetic debt, hedge fund will bet against the collapse of the synthetic debt via Credit Default Swap. Basically is an insurance on collapse of a synthetic debt or a genuine debt.

D. Private Equity Debt Implosion PE debt is created during a hostile take over. It is a trillion dollar business that employed about 7.5 million Americans and the PE debt created in tune of about USD5 trillions. Example, a PE firm will identify an undervalue company, and do a takeover of the said company. It will then cut cost (head count and reduce operation) to make it profitable, and on top of it, get the company to take up more loans (i.e. PE Debt). Should the debt is used to invest in high risk projects. E. Other Derivatives Debt Implosion A more complicated hybrid of debts which are less understood by many. Can be done on currency, commodities and other securities. Mainly used by hedge funds to make high risk investments (or gamble).

MyView

The figures is bigger than anyone can imagine, which, Fed cannot afford it, period. After all, Fed is privately own entity, who is not prepared to buy up all this toxic "assets". The implosion of ALL these types of debt will cause a Depression over a long long time like Japan. The effect is the Deflation on many type of Capital Assets where these debts are raised to buy. However, one may also be careful that certain consumables prices will remain high due to government intervention, such as medical, insurance and education. In a deflation environment, the momentum of the economy will slow down significantly and it is a silent killer. It will be evident by looking at the following factors:

• unemployment persistently high
• consumptions drop (especially on housing)
  
• saving rate increase
• bank credit shrink
• higher foreclosure
• higher bank goes bankrupt
• higher business go bust

Look at the Greece and Spain.