Thursday, April 01, 2010

Debt Jubilee: $38 Trillion in Private U.S. Debt Is Wiped Clean

by Charles Hugh Smith

In our April Fool's entry, we announce that a debt Jubilee of biblical proportions has just wiped out all $38 trillion in U.S. private debt.

In a surprise move, the U.S. Government announced a "Debt Jubilee" based on the Old Testament of the Bible. All private debt in the U.S.--$38 trillion--has been written off by sweeping Federal legislation.

The overwhelming majority of Americans responded to the news with tears of joy as their vast burden of home mortgages, student loans, auto loans and credit card balances suddenly dropped to zero balances.

Later in the day, those Americans whose pension funds and 401K accounts had held mortgage-backed securities or other debt-based assets (Sallie Mae funds, etc.) were shocked to discover that the liquidation of the $38 trillion in debt also liquidated $38 trillion in assets.

While those with little to no assets cheered mightily at the "Christmas in April" gift, those who had counted on the income from the $38 trillion in assets wept bitter tears; many fortunes and retirement accounts were effectively wiped out.

"Progressives" cheered the fact that since 93% of the financial wealth of the nation is held by the top 20% of households, then the wealth destruction fell most heavily on the wealthiest households.

"Conservatives" mourned the arbitrary destruction of so much of the nation's capital even as they consoled themselves with the thought that the destruction of debt/assets was Biblically inspired.

But the happiest citizens were the bankers, who realized the destruction of the debt freed them from insolvency. Yesterday they were burdened with trillions of dollars in uncollectible bad debt which they'd held on their books fraudulently, with winks and nudges from Federal regulatory agencies.

But today, the debts are gone, as are the assets--but since their liabilities in the form of impaired debt far exceeded their actual assets, the bankers are beaming broadly, for it is a wish come true: tens of millions of Americans now own homes and other assets free and clear, meaning that the banks can now lend them new trillions based on that collateral, and rake in billions in fees and interest.

The consumer economy is also salivating at the happy thought that Americans can now borrow trillions anew and blow the money on fancy meals, sea cruises, speedboats, handbags and all the other "luxuries" which U.S. corporations have made elsewhere and then mark up 500% to sell to U.S. consumers.

Only the taxpayers are still on the hook for the government's own debt. Other nations might not look too kindly on being stiffed for trillions of dollars in Treasury and agency debt that they own.

Deleveraging the U.S. Economy (Special Report from Comstock Partners)

Over the past decade (when we believe the secular bear market started) the total debt in the U.S. doubled from $26 trillion in 2000 to just over $52 trillion presently (peaking a few months ago at $54 trillion). This consists of $14 trillion of gross Federal, State and Local Government debt and $38 trillion of private debt. We expect the private debt to continue declining in the future as the deleveraging of America unfolds, while the government debt will very likely explode to the upside as the government tries to keep the economy afloat as the private deleveraging weights it down.

No more painful deleveraging, saving, or sacrifice; it's off to the spending-freely races again.

All in all it is a wonderful day; Americans have been saved from their excesses, banks have been saved from insolvency and all the multinationals and small businesses which depend on free-spending consumers are dancing in the streets: the American consumer is free again to extract all their equity and leverage their disposable income and spend, spend, spend on the finer things in life.

Only the owners of the gargantuan asset base which has been reduced to zero--those who have been ruined or seen their pensions decimated--only they do not cheer. But they are in the minority, and in the "democracy" of the Tyranny of the Majority (aided by the ever-present bankers, MSM shills and politicos), any government largesse is always applauded, always welcomed, always cheered and always supported at the ballot box, regardless of its consequences.

Happy April Fools Day!

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