Negative Equity and the Government

[imoldernu]

Most understand Negative Equity in the framework of auto loans, but the concept likely extends to debt in general, and more particularly to what is happening with U.S. Government debt.

A $30K car loan over 5 years could cost as much as $45K. The debtor looks at this as a buy now and enjoy for years, paying back with an increase in income, and more likely, because of inflation, paying back with lower value dollars. Then... 5 years from purchase date, obtaining a second loan for the balance... and so on.

As we edge toward twenty three trillion dollars in US debt, (an increase of about ten trillion dollars since 2016), the question may be: "Will this continue, and what will the next 5 to 10 years mean to the economy and personal plans for the future?"

Is there a way to look forward to take advantage of what could happen, or just go with the flow?

Keep in mind, that most ER people are "invested"... a small percentage of the population. Suppose... an individual net worth of $200K vs. $1M. Assuming a 50% deflation, who pays for the Federal Debt?

Maybe I have this wrong, but there are countries that are in better shape than the U.S., with lower government debt, but a lower long term risk factor... think Germany, France or even India.

Growing out of U.S. debt for the past 250 years, has come with advances in manufacturing, technology, and a steady birth rate... a combination that doesn't seem to have a replacement today.
.....................................................................................................

I fully admit to ignorance of world economics, and worse, can't seem to find an in depth analysis that addresses negative equity. Just looking ahead to possible ramifications of our rapid dive into national debt.

Too much to worry about? or just plain wrong? Won't affect me, but I have children and grandchildren.

 

[Chuckanut]

One of the saddest things in modern politics is how the deficit has been pushed aside as an issue, IMHO. It makes voting very tough as there are very few people running for office at the Federal level who deserve my precious vote.

I guess I am old fashioned, but I think candidates need to earn my vote.

 

[OldShooter]

... Is there a way to look forward to take advantage of what could happen ...

There are literally tens of thousands of professionals working full time using lots of computer power and huge databases, all trying to predict the future. They prove daily, really every millisecond, that they are unable to do that. Do you really think that we pipsqueaks can give you useful insights? Not to insult, but really?

 

[stepford]

Also debt and equity have a somewhat different meaning when the debtor controls the value of currency in which the debt is denominated.

 

[imoldernu]

Also debt and equity have a somewhat different meaning when the debtor controls the value of currency in which the debt is denominated.

+1 ... and that was the intent of the OP. Consider the actions of the Fed, in setting interest rates.

In this article, imagine that the Federal Government is the buyer of the automobile, and at the end of the original loan term... the unpaid balance which cannot be paid, is renegotiated, offering the debt to whatever source may accept this negative equity. If, in real terms, that source determines that the new "loan" is safe, it has accepted "negative equity" as having value.

https://www.wsj.com/articles/a-45-000-loan-for-a-27-000-ride-more-borrowers-are-going-underwater-on-car-loans-11573295400

The accepted value is usually "paid off" with devalued dollars. The length of time for that to occur is measured by the inevitable onset of devaluation.

To extend the automobile analogy... When the entity that accepts the unpaid balance on the car cannot collect, and the car has a very depreciated value, the owner of the "equity/car" cannot recover the accepted value, and the debt becomes worthless. The entity that loaned the monies, becomes bankrupt.

Work out your own scenario. As an interesting sidelight, consider the status of Japan, which, next to the United States has the largest debt burden. (twelve trillion to the US 23 trillion). A key to the survival of that country, with a relatively low... (to the US and China), GDP.... is that the Public Debt makes up the vast relative percentage to the debt... 264% compared to the U.S. 67%

All in all, an interesting dip into what will probably become a major factor in the future US economy.