Tootin' My Own Horn

Okay, I rarely get to do this as my bearish take on today's economy has not played out too well last year or this year to date, so please give me at least a limited chance to mention something where I hit the nail on the head. Back in January I posted some predictions for the year and here is one of them:

"The Euro will have some major hits as countries, like Greece, suffer some major ratings downgrades. Do not look to the Euro to replace the dollar any time soon."

Yeah baby!! Did I call that sucker or not? Now you may be saying that the writing on the wall was already pretty much there in January of this year (tell that to those buying Greece bonds in January). I would suggest that few people were seeing this situation unfolding at is has but let me assume everyone saw it coming in January. So let's go into the way back machine and see what I said January 1, 2009, on my predictions that, as I said at the time, I hope do not come true:

"EU with no U. The strains on the EU have never been greater and Germany's reluctance to play ball with the rest of the union will, in my opinion, cause a rift that cannot be fixed. I doubt the EU will disband in 2009, but pressures will reach a critical point and it may well happen in 2010."

Now I had a fair amount of feedback on this post disputing any idea that the EU would have any significant problems. I guess we will see, but based on the downgrades this week of Greece, Portugal and Spain by S&P and the increasing discord on that continent by citizens of countries like Germany not wanting to support other countries to this level, we are certainly going to see some sparks fly in the months ahead.

My personal view is that some of these countries, Greece leading the way, will either default or negotiate down their debt to pennies on the dollar (or Euro if you will). They have no other way to survive unless they are willing to live with a generation of pain and stagnation. Go ahead, go ask anyone if they want to live with a generation of pain and stagnation. Take a vote on it. Unless you are addressing the annual SM convention, there is no way citizenry will put up with this, so default is certainly in the cards, though I believe a renegotiation of the debt is more likely. Lots of haircuts to come.

My Bizarre Solution

It seems to me that pretty much the entire world, other than perhaps China, is in debt, both personal and public, over their heads. So I have to ask, who in the hell is owed all this money? I mean aside from China it seems everyone and every country has heavy debt, and personal levels of debt are high in China due to the real estate bubble and free lending there the last year or two. But again, to whom is all this damn money owed? I read recently that if Greece or other PIIGS fail, a lot of banks will have new debt woes as they own a lot of the sovereign debt. So, it seems to me that the debt is in no small part owed to the idiots that created the mess we have been living with the past few years. And so, let me make a suggestion.

What would happen if there is a worldwide declaration that all debt, both personal and public, is extinguished? Seriously, what would happen? Sure a lot of people owed the money would go belly up, including a lot of the financial culprits that created our problems. Sure a lot of retirement accounts, including mine, would take a big hit. But think about it. No one and no country has any debt. Once we flush out of the system those who go bankrupt because they were due the money, everyone is financially pretty sound - at least those with jobs. Sure there will be hesitancy for anyone to ever lend again, but there will always be someone to fill the void and they will simply be careful not to get us to a place where erasing all debt makes sense. Just an abstract thought on my part. I know I could spend a whole lot more on stuff if I had no debt.

Okay, I know this is silly, but I thought I would throw it out there. When sovereigns start defaulting soon, and they will, we will get a taste of the ramifications of debt being erased.

Disclosures: None.