This Time is Different, Reflections 7/18/2010

The concluding observation to chapter 2, "Debt Intolerance: The Genesis of Serial Default" is that, "Going forward, after the global financial crisis of the late
2000s subsides, a challenge will be to find ways to channel capital to debt-intolerant countries in nondebt form to prevent the cycle from repeating itself for another century to come." Reinhart & Rogoff's observations are spot-on for sovereign debt but, it needs to be noted, is equally applicable on a micro-economic scale.

There is no question that a prime mover of the 'global financial crisis of the 2000s' is the massive amount of unsustainable debt incurred by 'debt-intolerant' home buyers using insufficient income to purchase homes beyond their means and beyond the security of their employment.

How much more true is this of the fixed income homeowner in need of 'capital' today? The very same challenge of 'finding ways to channel capital to debt-intolerant homeowners in non-debt forms' is critical. Simply replace 'capital' with 'cash', 'debt-intolerant countries' with 'fixed income homeowners' and the use of HECS to convert existing home equity into cash becomes an obvious strategy for 'preventing the cycle from repeating itself...' Using HECS to provide cash to fixed-income homeowners relocates the 'risk equation' from continued employment to asset appreciation and in doing so, moves inflation from the 'risk enhancement' relationship it has with debt to the risk diminishment relationship of asset appreciation.