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Deep in Debt, Deep in Danger

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Can you visualize the coming readjustment? How and when should I brace for it?


I doubt that we’ll ever see a run-away inflation similar to those we can observe all over the world.

In the United States I expect the elaborate house of debt to deteriorate long before the dollar crumbles completely. I fear for the financial institutions that are enjoying the boom, extending their credits and maximizing their profits. As soon as interest rates return to market levels the boom will give way to readjustment, that is, stagflation or recession. Housing prices will decline, which will exert great pressure on the very collateral foundation of the housing boom. Having granted a mortgage loan of 80 to 90 percent of the value of a house, the lender faces substantial losses when its market price falls by 30 or 40 percent. Similarly, as soon as a recession descends on the country and unemployment rises to painful levels, many consumer loans are likely to default inflicting serious losses on lenders. In short, I expect the house which debt built to crumble long before the U.S. dollar goes to its glory. A wise man guards against this scenario by following Thomas Jefferson’s advice: “Never spend your money before you have it.”

Total U.S. debt (government, corporate, and individual) is estimated at some $37 trillion, which is more than three times gross national product. It doubled over the past five years and continues to grow every day. In addition, the U.S. Treasury reminds us of entitlement programs with unfunded liabilities of some $44 trillion. You may say, our children will be able to handle our debt. You may be right! They may follow in our footsteps and load our debt together with their own on their children, in a long sequence of generational debt passage. At the same time they will depreciate the currency and thus reduce the value of the debt. The value may fall at various rates, depending on the choices by the politicians in power. Whatever they may be, do not let the future disturb you.

Meet it with knowledge, courage, and entrepreneurial daring; it is yours to win or to lose.