Get Out of Debt Free?

So how do you get out of debt?

There are really four possibilities: save, default, inflate, or grow your way out. Saving is a possibility—the Irish seem to be doing that now. It worked for Canada, Mexico, and Sweden in the ‘90s. But it really works best with a small country with strong exports. And it’s hard: the public sector has to shrink, and wages fall.

Default is another option. Russia defaulted in the late ‘90s, as did Argentina in ’01. After some disruption, the economy begins to grow again. And creditors don’t seem scared off for very long: Russian debt is now investment grade. But default works best when a country has a lot of natural resources. That encourages lenders to come back.

Inflation can work by making today’s dollars less valuable than yesterday’s debt. But because of the global inflation of the ‘70s and ‘80s, many governments index taxes and pension payments to inflation. Also, inflation-linked bonds mean that government liabilities rise in line with inflation. So inflating away debt would require changing—or defaulting on—some of those agreements.

The last option is growth. If an economy grows faster than the interest being paid on the debt, the debt is a smaller portion of the economy. But growth isn’t a painless solution either. It means the public sector needs to be smaller so entrepreneurial energies get unleashed. It means regulations may need to be easier so businesses can devote more energy to innovative products and processes. It may mean privatizing some state-owned enterprises.

There’s no painless way out of debt—the each option involves political decisions. But one way or another, those decisions need to be made.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-11T10:03:53+00:00 September 29th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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