This of course being the title of a book that came to market (ever so timely) in 2009. The book won instant critical acclaim, and to read it for yourself at a later date, click the link below from amazon to order. However, this is not a book review. Having read the book, the main take-away is that all debt crisis’s have distinct, predicable patterns. (using the past 800 years as your guide).
http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165
Over these past eight hundred years, once a debt crisis occurred, it generally takes six to seven years to remedy the debt loads. There are three distinct phases of each debt crisis as follows:
1.) Private Sector Defaults: AIG, Bear Sterns, Lehman, Merrill, Fannie, Freddie, GM, Homeowners, etc.
2.) Weak Public Sectors Default: Ireland, Greece, Portugal, Spain, Italy, St of California, St of Illinois etc.
3.) Strong Public Sectors picks up debt loads: IMF, ECB, Federal Reserve, US Treasury etc.
This is to say, the last remaining public sectors are left with the task of restructuring the debt. Restructuring may include lowering interest rates on outstanding debt obligations, ‘haircuts’ for bond holders (not getting 100% of your money back), simply an outright default, (not paying back the debt at all), and the best trick of all, inflating the debt away. Inflation is the best ‘tool’ of choice for politicians. Once your grandchildren figure it out, those politicians will be long ‘gone’.
So as a practical guide, this debt crisis, although years in the making, began to unravel in late 2007. Add six to seven years, if history has anything to say about it, and you come up with 2013 to 2014 before any real progress will be made. Seems like we are on track. No?
Here are some select headlines around the world in recent months:
NPR October 20, 2011 Cash-Strapped Cities File For Bankruptcy
(FT) August 4, 2011 The coming crises of governments. “The global crises of financial and housing markets are now being superseded by new crises of governments. The fiscal challenges for the weaker members of the eurozone are early warnings, as are analogous problems in American state governments weighed down by unfunded pension and healthcare liabilities. Without action, this new crisis of state competence could soon become just as damaging as its recent financial predecessor.”
(Reuters) May, 23 2011- Illinois is “on the verge of a financial disaster” as payments on the state’s debt have skyrocketed, Treasurer Dan Rutherford said on Monday.
LA Times Feb 26, 2011 Debt takes a huge chunk out of California’s beleaguered budget
Needless to say, the work of these two authors has been foundational in my asset allocation policies for clients over the past two years. In fact, it was on August 20, 2009, when I began to publicly state my concern (in my blog) over the huge debt loads around the world. That thinking would influence my asset allocation decisions for clients over those next twenty four months right up to present date.
You can read my August 20, 2009 blog article here:
Commentary | Where do the markets go from here?
“In coming months, I may be recommending client’s shift more of their assets to wealth preservation and absolute return strategies along with continued use of inverse asset classes for such possible ‘range bound’ markets.”
Thanks for reading..
Additionally, consider reading the book, Endgame; The End of the Debt Supercycle and How it Changes Everything
