What about debt forgiveness?

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mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
What about debt forgiveness?

I begin this forum with not so much a prediction but a proposition to sound one’s ideas off:

 

Within five years time all debt will be forgiven. The reset button will be hit.

I believe something like this could happen if things reach the point that many believe they are going to reach in the next five years. I can conceive of this happening in two ways.

The first way is through catastrophe and its (debt forgiveness that is) implementation would be unofficial. For example, in a post-nuclear war-ravaged world involving instant casualties in the tens of millions, debt or the score of the Yankees-Red Sox game are obviously moot. Clearly if 9/11, which was symbolically potent to Americans but quite a small event in terms of the nuts and bolts of deaths and damage done in dollars, caused such massive destabilization and doubt in markets think of what nuclear war would do. Another catastrophe would be a tsunami hitting the Atlantic seaboard and destroying Boston, New York, Philadelphia, and Washington, etc.

The second way debt forgiveness could be manifested would be for national security reasons and would be implemented as the law of the land by the US government and/or through the policies of lenders. Already we are seeing events trending in this direction: local sheriffs refusing to kick people out of homes that have been foreclosed on; "freezes" on foreclosure proceeding already underway; lenders extending periods during which borrowers can be delinquent on their payments.

If our current economic situation continues to disintegrate and is further compounded by the confluence of the other two Three E’s, then debt forgiveness may become a foregone conclusion.

The aforementioned national security element comes into play because we may be faced with a situation where so many people are foreclosing on their homes that to kick them all out makes no sense (tons of people on "the streets," in shelters, or tent cities accompanied by oodles of vacant homes) and, theoretically, further burdens the government. That is if the government (federal or state) can even afford to run FEMA or whatever analogous agencies may pop up. Furthermore, more displaced people means more desperate people, which means a greater likelihood of "unrest" or violence/crime. Not a good situation.

To broaden this beyond housing: What if in two years time, in addition to the above scenario, the unemployment rate is at 25% (using the old method), regular unleaded is averaging $7/gallon, the Dow’s at 4000, and people are beginning to die in their homes during the winter because they can’t afford to heat them. If everyone’s broke and depressed, who’s collectin’. Or even has the ability to do so.

Our current model is very delicate and only small changes at this point in time could cause this confluence.

I’m reluctant to be so negative and doomerish, but in the end debt forgiveness may be one of the more sane things we could implement. And, of course, it need not be absolute. Meaning we could have partial debt forgiveness. Or mortgage forgiveness, etc.

I know debt forgiveness ruffles the feathers of pick-yourself-up-by-your-boot-straps believers (I’m not saying I don’t believe in that) and seems simply heretical to those who’ve been arduously paying off their debt to be better prepared for situations like the ones I’ve outlined above, but, hey, life’s not fair. Though it certainly is ironic.

switters's picture
switters
Status: Platinum Member (Offline)
Joined: Jul 19 2008
Posts: 744
I often wonder about this
I have nothing to add, other than I don't think it's as far-fetched as some would believe.  Obviously if things get to that point we'll be in very bad shape indeed.
wmarsden's picture
wmarsden
Status: Bronze Member (Offline)
Joined: Apr 6 2008
Posts: 38
Hmmm.   Interesting

Hmmm.   Interesting subject for Yom Kippur.

If there's a reasonable chance that debt will be forgiven, then the reasonable thing to do is to stop loaning people money immediately.  No more car loans.  No more credit cards.  No more student loans.  No more business start-up money.  No more cash-flow lines-of-credit so you can stock up before your busy retail season. 

But, isn't that exactly what is going on in the markets right now?

It makes sense if you think about it.  Once it becomes clear that people will steal your assets if they get near it, it makes sense to lock up my assets where no one can steal them.  In other words, get it out of bonds, get it out of stocks, put it in gold.

It's an interesting world we're creating for ourselves.

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