Characterizing Debt
Whether it be the USA, or Greece, or Ireland, or Italy, debt is never repaid in short order. The trick is to stabilize the debt and essentially make it appear as a non-issue,
What happens is that the political will in a country changes from an attitude of “if there is a need, the spending must occur”, to an attitude that “the debt is too large and must be reduced so spending must be curtailed”.
The Ways of Reducing Debt
The list is quite short.
1) Print more money in government printing presses so that the country has more money. This is usually effective, until the value of the currency starts to fall. The pain after a while becomes quite severe.
2) Create inflation so that dollars borrowed are repaid in dollars worth far less. If a borrowed dollar buys 12 tomatoes, and the dollar used to repay buys only 6 tomatoes, the debt becomes much more manageable. Inflation is good in small amounts and governments generally like it to be around 2% per annum. So a dollar borrowed, is repaid in 10 years with a dollar worth about $0.83. Meanwhile the country has grown and the debt looks less.
3) Default on the debt and reach some agreement to make things easier. There are many methods here. You can borrow more money from a larger country, or an international agency and usually there are some behavioural strings attached. Or you take some portion of the debt and ‘restructure’ it. Essentially the lenders agree to take that amount of debt and give it a new name, with a lower interest rate, and a much longer time to repay.
Whatever variation of these methods occur, or whatever name is given, the trick is to stabilize the debt so that so long as a country collects normal revenue, it will have the means to pay this new debt that is simply a variation of the old debt.
Canada’s Example
Debt rarely disappears. Canada is a prime example. Some years ago, the Canadian debt was threatening to destabilize the country. Politicians started making grand speeches about how they attacked the debt and other similar nonsense.
What really happened, was quite simple.
First, government made and kept a vow not to further borrow, so that the debt would not increase.
Next, tiny amounts of the debt were paid down each year and this payment was trumpeted loudly to the taxpayers. The amount paid down each year was so little as to be completely irrelevant, yet the government proudly announced what a splendid job they were doing. No-one really cared as long as the government said things were going well.
Lastly, let the economy just naturally increase as more children are born, more immigration occurs, and the economy expands. In the last 15 years, Canada’s GNP has grown far larger than it was. So the debt that once was 60% of the GNP, is now a small fraction of that.
The result of these three steps – Canada is regarded by the rest of the world as well managed, a safe place and a country that essentially avoided the 2008 meltdown.
The rest of the world simply will mimic these actions and over time, the problem will disappear.
The Coming Boom in the Stock Market
We reproduce an article that mirrors our sentiments.
Avner Mandelman ,Globe and Mail on the weekend—“Behind World’s debt woes, there’s a buying opportunity.”
“……what of the U.S. debt? ………today’s U.S. debt as a percentage of GDP has been this high only once before—in June, 1942. That date coincided with the Battle of Midway and was also the beginning of a bull market that saw the Dow double in four years, as the stock market anticipated the U.S. win over the bad guys. Yes, at the exact moment when everyone was panicking, the biggest problems were already being fixed—and the market saw it. I believe things are being fixed now too, and the panic is part of the repair mechanism.
………the market’s decline isn’t over. Leaders in Europe, in China and in the U.S. still need some panic to sell bitter medicines to their constituencies. But none of these places is a basket case. Their problem is politics—how to distribute the pain—and panic will help sell the solutions.
……….once the panic hits its peak, we should enjoy a wonderful buying opportunity.”
The Cymor Strategic Growth Funds mirror this sentiment.
