June 20, 2006

Mama Mia what a mountain of debt!

Sir, Zachary Karabell and Dan Chung in their “Alive and well under a mountain of debt”, June 20, look to provide comfort to the holder’s of the American’s Consumers Debt portfolio, and they are not doing such a god job.

First they draw our attention to some figures that even though they themselves do not seem too very upset about them (American stiff upper lips?), makes it hard for an ordinary reader to refrain from letting out a Mama Mia! Against a total market value of assets of $52,000bn, which includes the value of homes, they tell us American consumers owe $11,500bn. This whooping amount is not invested in a very well diversified portfolio either, as most of the income of the debtors and the value of the assets given in guarantee depend on the state of the US economy, which, to add salt to injury, is quite a prolific public debtor itself.

To top it up, the authors find their main ray of light in that “the world is awash with labor which combined with favorable demographics in the developing world, means that inflation should trend lower and rates more likely to be 2 per cent than 6 per cent the coming years” which only implies that they expect foreigners to keep on working hard in order to reinvest their surpluses in this portfolio at bargain rates. If so, they need to be reminded that this does not repay the American consumer’s debt, this does just postpone the day of reckoning.

Finally the authors refer twice to Poor Richard, which is also quite surprising given the topic as all we can remember he said in reference to debt is that “Industry pays debts, while despair increases them.”