Wednesday, July 15, 2009

We own you

The Big Picture selects several articles for us on US debt.

This one points out that to balance the US budget with borrowing, new bonds must be sold totalling 3 times the amount issued last year. Bearing in mind that there's less money around, and that people are getting nervous about America's credit rating, inflation and the value of the dollar on the international market, it seems very unlikely that this new debt auction would succeed; and if it did, it would have to be on the basis of higher interest rates, to factor-in the various increased risks.

Alternatively, it's time for the repo man - with a twist. Nassim Taleb and Mark Spitznagel suggest that banks could take part of homeowners' equity in exchange for lower interest rates. But if houses continue to decline in price? I bet the banks have thought of that, so if such a scheme were introduced, they'd want a bigger share than most homeowners would be willing to give them. My guess is that when houseowners realize that the market isn't going to turn soon, there'll be more voluntary bankruptcies and doorkeys in the post. That, plus rising and lengthening unemployment could set off the domino chain.

But returning to the Sprott analysis, note that late last year, 28% of US debt was foreign-owned. Look out for some form of debt-for-equity here - if not the sale of equities, then in the form of favours and concessions. He who pays the piper calls the tune.


dearieme said...

Have you noticed that there are lots of tales to the effect that the flood of properties "in foreclosure" in parts of the USA is too much for the lenders to deal with, so that many homeowners can stop paying the mortgage and carry on living in the house since it will take ages for the lender to act. How very tempting, especially in California with its "no recourse " law.

James Higham said...

In a similar vein, the recourse to bankruptcy must be a sore temptation to morgagees.

Sackerson said...

Hi, DM, James. I think I've read that the no-recourse rule doesn't apply if you've remortgaged. But I think I've seen reports like the one you mention - and there's an incentive for banks not to show how big their problems are. Head in the sand, but backside still exposed.