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Does The World Have The Courage To Deal With Its Debts?

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http://www.telegraph.co.uk/finance/comment...-its-debts.html

Deflation is spreading from the core of the global system to the most unexpected regions of the world. It has even reached Latin America. Prices are sliding in Peru, Chile, Colombia, Paraguay, Bolivia, Ecuador, Guatemala, and El Salvador, to the consternation of everybody.

Enough of the world has already fallen so far into pre-deflation conditions that any misjudgment by the big central banks from now risks setting off a chain-reaction that may prove very hard to stop.

CPI inflation has dropped to –2.2pc in Japan (a modern record), -2.1pc in the US, -1.8pc in China, -1.4pc in Spain, -0.7pc in France, and -0.6pc in Germany.

This was not anticipated by the authorities anywhere, so we should be wary of their assurances now that we face nothing more than a brief dip in prices before rising energy costs bring inflation back into familiar and safe territory. No doubt prices will rebound as the "base effect" of oil prices kicks in. But by how much; for how long?

The sum of economists in the world (outside Japan) familiar with the cultural and psychological dynamics of deflation can fit into one London bus, and most are historians of the 1930s.

If PIMCO guru Bill Gross and hedge fund manager Paul Tudor Jones are right in fearing that the US economy will tip back into a "W-shaped" recession as the sugar rush of fiscal stimulus fades, we may wake up to find that we have baked deep deflation into the pie for 2010 and 2011. The G20's talk of "exit strategies" and rate rises will seem surreal.

White House aides are already mulling another blast of spending. It won't fly. We have hit the political limits of such extravagance almost everywhere. The fiscal crutches of recovery are going to be knocked away, with outright tightening in a slew of states nearing the danger point of debt-compound spirals. This will occur in a world where excess capacity is already at post-War highs. It reeks of deflation.

Irving Fisher explained why the self-correcting mechanism of economies breaks down in his Debt Deflation Theory of Great Depressions in 1933: "Over indebtedness to start with, and deflation following soon after". Most of the West has exactly that, but worse – debt is much higher.

He coined the term "swelling dollar" to describe how falling prices and incomes raise the real burden of debts, leading to asphyxiation. There is a "swelling yen" in Japan today. Earnings were down 4.8pc in July from a year earlier. Bonuses fell 11pc. Wholesale prices fell a record 8.5pc.

Yes, Japan rebounded in the second quarter as shipping finance came back from the dead. The free fall has stopped. That is all. Industrial output was still down 23pc in July year-on-year.

What matters for debt service is that Japan's economy has shrunk by a tenth. Debt has not shrunk. It is rising. The public debt will rocket to 215pc this year.

China is in better shape but it is remarkable that there should be any deflation at all in a year when banks have let rip on credit, doubling lending to $1.1 trillion in the first six months.

The money has leaked into property and the Shanghai stock market; or worse, it has been spent building yet more excess plants to produce goods the world cannot yet absorb. This is much like the late phase of America's Roaring Twenties when asset prices reached their crescendo even as the underlying economy – burdened with over-capacity – tipped into deflation.

Beijing is at last tightening credit, mostly by stealth. We will learn soon whether Market Maoists are better at pricking asset bubbles than Ben Strong's Fed in the 1920s, or Ben Bernanke's Fed today.

I suspect that Dr Bernanke is more worried about deflation than he dares to let on. His ex-colleague Frederic Mishkin let slip last month that the Fed would be showering more money on the economy (buying US Treasuries), not less, were it not for market angst over the monetization of US deficits.

Bernanke is learning that he cannot in fact administer the anti-deflation medicine he talked about so confidently seven years ago. He can act only if and when the danger is so blindingly obvious that resistance crumbles.

There are three ways out of our mess. We can pursue 1930s liquidation that purges debt through mass default. Such Calvinist destruction cannot be imposed on a modern democracy.

We can devalue debt by deliberate inflation. This will backfire as bond vigilantes boycott government debt - unless rigged by capital controls or "administrative measures". You see where this leads.

Or we can try to right the ship by paying down our debts, very slowly, by sweat and toil, navigating a treacherous course between the Scylla and Charybdis of the twin-flations, for as long as it takes. This is the only responsible course left we as we face the devastating consequences of our own credit delusions. Are we up it?

Just how are people going to pay off their debts? If unemployment increases you lose the means to pay down your debts. This is further compounded by falling demand for goods and services which then impacts on those still in jobs, all things being equal that should trigger wage deflation which means even those in employment can't pay down their debts.

We are totally screwed, Japan tread water by trading with the rest of the world, but the rest of the world can't trade with itself.

Are we about to see debt destruction?

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deflation? chain reaction? difficult to stop?

deflation is self curing. it stops on its own when people can afford to buy things again. it puts savers in the driving seat, savers who need to save a deposit for a house, for a retirement.

inflation does the opposite, it needs controlling it is open ended. it destroys savers, savers cant save for a deposit or their retirement.

I know which I prefer...the one that helps people, not banksters.

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deflation? chain reaction? difficult to stop?

deflation is self curing. it stops on its own when people can afford to buy things again. it puts savers in the driving seat, savers who need to save a deposit for a house, for a retirement.

inflation does the opposite, it needs controlling it is open ended. it destroys savers, savers cant save for a deposit or their retirement.

I know which I prefer...the one that helps people, not banksters.

It isn't banksters theyre trying to save - it's creditors. To say otherwise is to miss the barn door.

Edited by Alan B'Stard MP

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at the end of the article he gives three options. default, inflate or work hard and pay off the debt.

well, think hard about it and there is only one way this govenment will go. and the US also. and thats inflate. they are doing everything they can to do it and are succeeding very well.

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Or we can try to right the ship by paying down our debts, very slowly, by sweat and toil, navigating a treacherous course between the Scylla and Charybdis of the twin-flations, for as long as it takes. This is the only responsible course left we as we face the devastating consequences of our own credit delusions. Are we up it?

That does not work

Things are to leveraged they are either going to go up (inflation) or go down (deflation)

They never stay the same due to people either wanting a discount of overbidding with the feeling that prices will rise.

10 Houses on the street all worth 300k in 2007 a) you tell them prices are going down and they discount to be ahead of the curve B) you tell them prices are going up and they ask for 325,000 or maybe even more.

Fear and Greed the most powerful Human emotions in Finance.

Edited by Fromage Frais

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A debt jubilee? Just imagine in a couple of years time all the homebuyers who used to have huge mortgages making wnkr gestures at you saying "ha ha they gave us the house!"

I doubt that they would do a debt jubilee that way. Maybe a correction of the debt owed, ie 50% reduction in debt to go with a say a 60% drop in wages.

The economy needs to deflate.

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It isn't banksters theyre trying to save - it's creditors. To say otherwise is to miss the barn door.

I thought the bankers were the creditors.

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The inevitability of deflation argument can be countered by asking the question "What would happen if everyone was mailed a million pound cheque tomorrow?". Clearly deflation is always a choice, it can always be countered by the printing press.

The problem with paying off the debts is that it will reduce consumption. That in turn will mean factory closures and unemployment leading to further drops in consumption in a vicious circle. The authorities do not want this to happen. As we have seen they want you to consume, thus providing jobs. They have little choice but to inflate and they will do so. Cash savings and debts will be wiped out. The government gets a tax windfall, not only from rising nominal incomes, but from the imaginary capital gains as asset prices rise to reflect inflation.

All this talk of bond markets punishing governments is just talk. The investors have no place else to go. They stay in cash, they get inflated away. They move to bonds, they get sub-inflation yields. They move to assets, they help pump prices as desired and generate capital gains tax. The central banks move in tandem now. Bond investors cannot escape by moving elsewhere.

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The inevitability of deflation argument can be countered by asking the question "What would happen if everyone was mailed a million pound cheque tomorrow?". Clearly deflation is always a choice, it can always be countered by the printing press.

The problem with paying off the debts is that it will reduce consumption. That in turn will mean factory closures and unemployment leading to further drops in consumption in a vicious circle. The authorities do not want this to happen. As we have seen they want you to consume, thus providing jobs. They have little choice but to inflate and they will do so. Cash savings and debts will be wiped out. The government gets a tax windfall, not only from rising nominal incomes, but from the imaginary capital gains as asset prices rise to reflect inflation.

All this talk of bond markets punishing governments is just talk. The investors have no place else to go. They stay in cash, they get inflated away. They move to bonds, they get sub-inflation yields. They move to assets, they help pump prices as desired and generate capital gains tax. The central banks move in tandem now. Bond investors cannot escape by moving elsewhere.

deflation is the symptom of the cure to the boom.

to counter with more means of exchange does nothing to solve the problem...excess production is still there whether or not a coffee costs £3 or £3000.

but, inflation destroys savings and serious inflation destroys economies.

we are,as we have been since 2005 IMHO, between a rock and a hard place.

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It isn't banksters theyre trying to save - it's creditors. To say otherwise is to miss the barn door.

Oh it's banksters alright.

Savings meams somethign quite different to the average punter than a banker - and if the punters find out there will be blood. :)

Needless to say, there will be blood. These cycles have almost always ended in a massive tide of violence and revolution. in fact I stuggle to thinik of one that didn't. Maybe genghis khans paper money advanture ending was less violent then havign it......

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at the end of the article he gives three options. default, inflate or work hard and pay off the debt.

well, think hard about it and there is only one way this govenment will go. and the US also. and thats inflate. they are doing everything they can to do it and are succeeding very well.

The debt cant be paid off, not in any shape or form. The return of the dinosaurs is as about as likely an event. For debts to be paid you need a forever growing economy, and that requires an infinite sized planet. Let me know when you find one of those so i can relocate.

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For debts to be paid you need a forever growing economy, and that requires an infinite sized planet.

justify this comment - imho it is intrinsically wrong

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The debt cant be paid off, not in any shape or form. The return of the dinosaurs is as about as likely an event. For debts to be paid you need a forever growing economy, and that requires an infinite sized planet. Let me know when you find one of those so i can relocate.

Why do you need an infinite sized planet?

What you need are jobs where people don't consume but will pay.

ie massage involves no real consumption and can provide endless work.

Ensure everyone has a hair cut every 7 days etc...

Force everyone to have a personal trainer.

There are plenty of low consumption businesses that could solve the economic problem without resolving the need to buy tat.

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We can devalue debt by deliberate inflation. This will backfire as bond vigilantes boycott government debt - unless rigged by capital controls or "administrative measures". You see where this leads.

Why do you think the BoE is buying government debt? In a chartalist system, you have no need for gilt issuance, rendering bond vigilantes ineffective.

By buying up gilts from other holders, the BoE can effectively position itself for an inflationary surge, without alienating government debt holders (including foreigners).

People talk of a debt jubilee, but what would happen if every adult in the UK was given enough money to pay off the majority of private debt? Inflation would rip through the system, voiding debt and taking value from the cash rich. Anyone unprepared and holding Sterling will be wiped out.

Post inflationary pulse, the banks could be forced to hold full reserves, chartalism could be used to fund government borrowing and the power of the bankers would have been smashed. During the process, encourage new currencies to flourish, but only allow payment of taxes in Sterling and you have a free market system, where each currency keeps the others honest.

Yes, it would suck for those holding lots of cash, but many of those gains have been made on the back of a broken banking system. Not meaning to piss on the STR fire, but you wouldn't have that cash if it wasn't for the banks extending masses of credit. I would feel sorry for those who earned their cash in alternative ways, but I would hope they are smart enough to have moved out of Sterling already.

EDIT: To add - the currency would be worth far less, which would make imports very expensive, stimulation a manufacturing renaissance.

Life would be much harder, but there is no easy way out. You either drag it out over decades, watching business crumble and debt slaves grumble, or you smack it down in one go, purge the system and start afresh. Infrastructure would still remain, as would the skills of the people. Some businesses would no longer be viable, but new businesses would flourish.

Edited by Traktion

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The problem with paying off the debts is that it will reduce consumption. That in turn will mean factory closures and unemployment leading to further drops in consumption in a vicious circle. The authorities do not want this to happen.

Sure, deflation will reduce consumption. But hyper-inflation would completely abolish consumption. How could anyone consume without [sound] money?

There is nothing to be gained by a deliberate policy of hyper-inflation; quite the opposite, it would only compound the problems ten fold.

Policy makers are constrained by reality, and the potential destruction of the currency.

Edited by roman holiday

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Taking the long view, in history do very large debts tend to get paid off?

Britain has paid off the war debts run up against Napoleon and in the First World War. I think we are still ponying up for WW2 (?).

Carthage paid the Romans the reparations due after the Punic War.

But France never paid back Napoleon's borrowings, Germany never paid for either World War.

What normally happens?

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Taking the long view, in history do very large debts tend to get paid off?

Britain has paid off the war debts run up against Napoleon and in the First World War. I think we are still ponying up for WW2 (?).

Carthage paid the Romans the reparations due after the Punic War.

But France never paid back Napoleon's borrowings, Germany never paid for either World War.

What normally happens?

Iceland doesn't seem to want to pay anything back either.

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Taking the long view, in history do very large debts tend to get paid off?

Britain has paid off the war debts run up against Napoleon and in the First World War. I think we are still ponying up for WW2 (?).

Carthage paid the Romans the reparations due after the Punic War.

But France never paid back Napoleon's borrowings, Germany never paid for either World War.

What normally happens?

http://www.worldwar-two.net/noticias/133/

The United Kingdom pays back today the final installment of loans taken out at the end of the World War Two used for the reconstruction of the country. According to the Treasury minister, the United States and Canada will receive, respectively, $83.25 million and $22.7 million. These payments are the last ones of a sequence of refunds done since 1950.

This week we finally honor in full our commitments to the U.S. and Canada for the support they gave us 60 years ago, Treasury minister Ed Balls said yesterday.

It was vital support which helped Britain defeat Nazi Germany and secure peace and prosperity in the post-war period. We honor our commitments to them now as they honored their commitments to us all those years ago, he added.

During World War Two, the United States effectively gave Britain billions of dollars worth of goods under the lend-lease program, financing London money to buy oil, food, weapons and military equipment.

To date the country has paid a total of $7.5 billion to the United States and $2 billion to Canada.

The Treasury noted that there were still World War One debts owed to and by Britain, but that no action had been taken on either count since U.S. President Herbert Hoover declared a moratorium in 1931 during the Great Depression.

December 29, 2006

It took 60 years but was eventually paid back, although probably paid back with more debt and it just got rolled over.

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I thought the bankers were the creditors.

The bankers are debtors too. Who are they debtors to?

and if the punters find out there will be blood.

Who is going to be wanting to spill blood?

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