Saturday, November 14, 2009

Debt and lots of it

The Perfect Storm

Article on debt concludes that we end up in a forced position of borrowing from abroad. However, borrowing from abroad damages exports.

Posted by stillthinking @ 11:28 AM (1234 views)
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4 thoughts on “Debt and lots of it

  • “Many economists – and the Government – continue to argue that the UK can handle a much higher Government debt burden, citing Japan and some other EU economies, such as Italy, as examples. The key difference with those countries – Japan in particular – is their much lower level of household debt and higher domestic savings. As Governments ultimately only get money from one place– taxing their citizens – Government debt is a claim on households. Paying attention to the total sum of household and Government debt is extremely important for this reason. When households are highly in debt with low savings themselves, the money to finance Government deficits either has to be printed or borrowed from abroad. This is why more experienced finance ministers know that Governments should be saving when their electorate is borrowing. There are very few precedents globally in the last few decades for a Government to join in a private sector debt binge in this manner.” – the USA did it as well while we were doing it.

    In terms of funding this and the comparisons with Japan. I remember a couple of weeks ago there was talk of Japan going to the wall. This was combined with hedge funds shorting Japanese Government Bonds. This sent yields (rates) spiking up but since then they have come all the way down again due to domestic Japanese JGB buyers. “There are two golden rules in life: don’t get involved in land wars in Asia and don’t fight Japanese domestics on rates.”

    It’s amazing rates can stay so low in the markets, I guess the fear of deflation must still be strong. The only thing that will drive up IR seems to be a proper recovery, not one fueled by government stimulus programs.

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  • stillthinking says:

    My view is;
    The driver of interest rate rises at the moment would be currency debasement.* There won’t be a recovery in the UK in 2010 or 2011*. My reasoning is that the UK is chock-a-block full of malinvestment, had we taken the recession full on we would have very high unemployment, but with a healthy rump of virtuous circulating economic activity. This would provide the solid base for subsequent growth.
    What in fact we have done is maintain through extending debt at government level an unsustainable economic structure. Simply, sections of the UK are running purely because of government debt. There has been no shake out of the false economy. This creates an uncertain atmosphere for investment because who can know what kind or level of demand there will be going forward, there is no healthy reliable rump to base investment decisions on. Further, everybody now knows that the ability of the government to maintain the false economy will end next year. However, loss-making ventures by their nature cannot last forever. By acting to ameliorate a sudden but necessary collapse in the economy, the government have delayed our arrival at an economic turning point of back to growth. The collapse of loss-making ventures is a precondition for healthy growth. Interest rates are low as similar denial applied to failed banks, banks now rebuild capital by pricing debt at a level to cover numbing default levels, this puts debt beyond the reach of SME and consumers. When banks refuse loans they are in essence saying “our debt costs due to defaults are more than you are capable of servicing”, i.e. hoist on their own petard.

    This is why I think Spain and Ireland will do better than the UK, because they are hitting healthy rump much sooner than the UK. This base level will then allow growth while we are still dragging out our decline similar to Japan, a decline which further muddles the economy by misleading people on job skills. The government base policy on the wrong presumption that the economy was fine but was hit by a credit shock, and to that end fixing the credit shock will fix the economy. But unfortunately they are wrong (or I am).

    This will be shown to be true by the gradual and then rapid recovery of Ireland while the UK drags out a slow death.

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  • Good graphs! sums up pretty well why being long term bearish on sterling is not such a bad idea

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  • Jesus — Frazer Nelson *and* Melanie Phillips both mentioned on the same page. Now that’s a website to avoid.


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