Grantham: 3 (actually 4) Ways To Balance Debt And Asset Values

The admired value investor Jeremy Grantham published his "Quarterly Letter", actually part1 of that. As always, it is worth reading the full letter. However, we recently reminded about the "debt - the mother of all problems". In this regard Grantham writes:

Given where we are today, there are only three ways to restore a balance between current private debt levels and our reduced, but much more realistic, asset values: we can bite the bullet and drastically write down debt (which, so far, seems unappealing to the authorities); we can, like Japan did, let the very long passage of time wear down debt levels as we save more and restore our consumer balance sheets; or we can inflate the heck out of our debt and reduce its real value. (In the interest of completeness I should mention that there can sometimes be a fourth possible way: to somehow re-inflate aggregate asset prices way above fair value again. After the tech bubble of 2000 Greenspan found a second major asset class ready and waiting – real estate – on which to work his wicked ways. This time there is no new major asset class available and, although Homo sapiens may not be very quick learners, we do not appear eager to burn our fingers twice on the very same stove. As a society, we apparently need 15 to 20 years to forget our last burn. With so many financial and economic problems reverberating around the world and with animal spirits so crushed, re-inflating equity or real estate prices way above fair value again in the next few years seems a forlorn hope if indeed it is possible at all.)

So, watch the way we get out ...