The one with the most debt when the economy collapses wins

SEinSF · Post by **SEinSF** » Mon Aug 08, 2011 7:55 pm

A friend made that comment to me the other day and I didn't know how to reply. I see his point but I've taken a different path and have paid off my debts and am saving as much as possible. I do see economic trouble coming, though, so maybe he is right. I'd appreciate alternative perspectives ... any thoughts?

George the original one · Mon Aug 08, 2011 8:12 pm

How is he scoring "the win"?
Most debt, apart from mortgages, can't even be discharged in a bankruptcy now, so if you have to go through bankruptcy, you won't even be able to share in an economic recovery.
Taking on debt when the bottom hits *might* be the right thing to do, so you're leveraged on the recovery gains, but carrying debt going into a plunge is going to make it very tough to keep your head above water.

Dienekes · Post by **Dienekes** » Mon Aug 08, 2011 8:33 pm

In that scenario, has anyone really won? For lenders not to care about outstanding debt obligations, that means we are pretty much at TEOTWAWKI. Sounds like a blast having a discharged iPad, a huge empty house that is impossible to heat without electricity/gas, 3 cars sitting on empty, and 3 HDTVs used as mirrors.

JohnnyH · Post by **JohnnyH** » Mon Aug 08, 2011 8:34 pm

This is a pretty silly and dangerous idea on an individual level... On a national level, or corporate level seems to be working well (bailouts, baby!)
Like George said, debt is getting harder to default on. Even if there was a currency failure, it would be replaced with another at an unknown value.
I think betting against the USD by getting callable debt (that you are capable of repaying at any time) at low interest rates, might be a good idea... If I could get an excellent entry price on a house I want I'd be happy to lock-in a 4.5% 30 yr bet the USD will continue to decline. I LOVE IB's low margin rates, which I use for even more permanent portfolio.
Racking up any debt with high interest, or that you do not have the ability to pay back now, is asking for bad trouble. Wealth comes from savings and investment, not borrowing.

mikeBOS · Post by **mikeBOS** » Mon Aug 08, 2011 8:40 pm

@Dienekes "In that scenario, has anyone really won?"
I suppose if anyone did, it would be the debtor. Since they at least had "fun" while the lender delayed enjoying the benefits of their savings. It's kind of the same argument as wanting to bounce the check that pays for your coffin. Doing absolutely as little work as possible and having the most fun possible. Sounds good enough to me. But you don't know when you're going to die. And you don't know if/when the economy will collapse to the point where people won't bother trying to collect.
What if he's wrong and it doesn't collapse? He's betting on the financial world ending before nightfall, when he'll have to lie in the bed he's made.

Mo · Post by Mo » Mon Aug 08, 2011 8:52 pm

My response is "wins what?"
How does one define "economic collapse"? Did it happen in 2008? If so, individuals with the most debt didn't seem to win very much. As for corporations, did Lehman Brothers win? I don't recall reading stories about debtors winning in the great depression, either.
Bailouts and handouts aren't popular with anyone other than the beneficiary, but did AIG really win? Did GM?
The person who lives for free for a year or two without making payments on his house may seem to win short term, but there will be long term reprecussions to that person's credit.
If AIG, GM, and those who get a free year of housing followed by 7 years of hardship are winners, perhaps I'd rather lose...

irononmaiden · Post by **irononmaiden** » Tue Aug 09, 2011 11:04 pm

Sounds like dark humor, in the same vein as when people say their retirement fund is a bottle of whiskey and a bullet.
Yes, if we go all Mad Max, I won't have to pay off my mortgage. But it'd be nigh on impossible to time it just right. It'd take a smartass to plan it, but a dumbass to do it.

newb · Post by **newb** » Sun Feb 19, 2012 10:42 pm

the idea behind that statement is that when inflation becomes rampant, your pay will increase exponentially while your debt will not, thereby making it easy to pay off the debts owed with wheelbarrows of useless cash. However, trying to pay debts when inflation is high but doesnt go past a certain point for a few years or even months brings short term financial pain as the interest plus principal still has to be paid while trying to buy rapidly increasing material items like food. unless you just choose to ignore your debts and never pay them until they garnish your wages.

Dragline · Post by **Dragline** » Mon Feb 20, 2012 12:35 am

Your friend needs to understand that economies can collapse in different ways.
In a deflationary scenario, debtors get crushed and are reduced to subsistence. This is what happened in the first years of the Great Depression. If you want to know what its like on a personal level, go read Grapes of Wrath.
In a hyper-inflationary scenario, all debts are essentially wiped away and the creditors and those living on bond income and pensions are the ones who are made destitute. If you want to know what this is like, read "When Money Dies", which chronicles that scenario in post-WW1 Germany. But bear in mind that the German hyperinflation was followed by 10 years of depression, so everyone got a beat down in good time.

HSpencer · Post by **HSpencer** » Mon Feb 20, 2012 1:16 am

@ George the Original----"Most debt, apart from mortgages, can't even be discharged in a bankruptcy now, so if you have to go through bankruptcy, you won't even be able to share in an economic recovery."
Right on. And to make matters worse, if they brought HSpencer to court, I can promise you they would recreate debtor's prison and I would be breaking rocks for the rest of my life!

(I fail to have the kinds of good luck others have is what I am saying here.) Can you imagine how swinging a sledge hammer at my age would tire me out?

jennypenny · Post by **jennypenny** » Mon Feb 20, 2012 1:34 am

@dragline--My high schooler had to read Grapes of Wrath as part of her summer reading last year. After she told me what she thought of it, she said "But that couldn't really happen, right?" You should have seen her face when I told her it already had.

livinlite · Post by **livinlite** » Wed Feb 22, 2012 1:26 am

@jennypenny - I feel for your position explaining that stuff to the kids, but I think that's one area where being truthful and talking through the situation is the best way to go. Especially if they are high-schoolers...their going to find out shortly what a cold cruel world is out there...and might as well start altering their conceptions of success and mastery to match with what's possible...as well as learn to have compassion for those who are slipping further behind...which starts with admitting those people exist...something our media/schools don't seem ready to do..

Ego · Post by **Ego** » Wed Feb 22, 2012 2:19 am

As Dragline pointed out, hyperinflation caused creditors to be "the losers" because the debts are paid back with cheaper dollars. At least that's how it used to work. Not any more.
Argentinean banks forced a redenomination of debts after their recent currency crisis. The person with the equivalent of a $100K mortgage before the devaluation had a $30K mortgage for a few weeks. Then the government passed a law redenominating contracts so that they were back near $100K.

jennypenny · Post by **jennypenny** » Wed Feb 22, 2012 2:40 am

@livinlite--The book was required for her American literature class so I understood her assumption that it was fiction. Fortunately (unfortunately?) she knows what real poverty is because she volunteers at a soup kitchen in Trenton regularly.
I think there is a big difference between rural and urban poverty. If the economy collapsed it would be different this time, and more violent, because the poverty would be concentrated in urban areas.

Post by **jacob** » Wed Feb 22, 2012 3:29 am

Gen Z are die-hard optimists [with no apparent sense of reality]. I saw a family member discussing with her fb friends how many from her high school class they thought would be rich/successful. The consensus was somewhere north of 90%. Then a second question came up: How many were going to be famous. The consensus was 40%. Indeed, the belief is that over the next couple of decades, at least 150 of the celebrities you see on TV or read about will all have originated out of the same high school in Podunk.

secretwealth · Post by **secretwealth** » Wed Feb 22, 2012 7:44 pm

I'm not sure if it's optimism or extreme arrogance. We Gen Xers were very cynical, bitter, angry people as a whole--not too surprising since we were first in line to be fucked over by the Boomers. I guess the Millennials have benefited from a school system where bullying is kept in check and education is more about building self-esteem than actually teaching. How times have changed. In my school as a kid, teachers often joined in with the students to bully a whipping boy or two.