Only mass default will end the world's addiction to debt

[Ad Orientem]

http://www.telegraph.co.uk/finance/comm ... -debt.html

Not just sovereign debt...

[Ad Orientem]

FWIW I rather disagree with Warner's apocalyptic view of a coming hard default. Yes, there will be a mass default, but it will be a soft one. The traditional solution to excessive sovereign debt can also be easily applied to private or corporate debt. Flooding the world with newly printed money will have the effect of inflating away a lot of this debt.

[moda0306]

Ad,

What makes you think we'll have high inflation?

And if it's so certain that we WILL have inflation, why hasn't it reared its ugly head yet?

And if inflation is NOT a risk, why is our use of debt an "addiction" rather than simply a logical financial tool, in many cases?

[Ad Orientem]

Ad,

What makes you think we'll have high inflation?

And if it's so certain that we WILL have inflation, why hasn't it reared its ugly head yet?

And if inflation is NOT a risk, why is our use of debt an "addiction" rather than simply a logical financial tool, in many cases?

Well so far deflationary pressure has been greater than inflationary. Despite all of the screaming from the usual suspects, QE has actually been rather restrained in the United States. For its part the BOJ has only in the last couple of years shown anything faintly resembling a serious determination to break the deflationary depression in that country. And the Euro-zone effectively has no central bank in the usual sense of the term. Its hands are so tied that I doubt they are capable doing what needs to be done. (Another reason why I think the EMU's days are numbered.)

In the end though I think inflation is the only choice many countries will have. Here, we might see some if the economic recovery is not in fact as fake as some people think. But the bottom line is that there really hasn't been a serious attempt so far to create inflation in most of the world.

[MachineGhost]

In the end though I think inflation is the only choice many countries will have. Here, we might see some if the economic recovery is not in fact as fake as some people think. But the bottom line is that there really hasn't been a serious attempt so far to create inflation in most of the world.

Yup.  Politicians are not economists.  And not all economists agree with each other anyway.  You have Krugtron the Invincible who thinks QEternity would cause inflation despite years of failing, then you have more sensible economists who think pro-growth policies would create inflation but nothing substantial ever gets pass the ignorant politicians.  Our biggest win since 2009 has been in allowing Joe Sixpack to legally invest in non-public startups at the end of this year.  That could jumpstart our economy and kickstart inflation.  Do not underestimate this "surprise factor".

In theory, the global debt problem is so big now which is why deflation is triumphing worldwide, but we've already repaired our balance sheet here.  With the rest of the world mired in deflation, it will eventually drag down the USA.  I think we'll get a safe haven bubble out of it for a while though, before the new world currency.  As the global reserve currency, we're gonna be mostly spectators as the globe goes up in flames.

The thing that keeps me awake at night is unlike 1933 there is no gold standard for the government to break the legs of deflation and restore normalcy.  What is our out this time?

[moda0306]

In the end though I think inflation is the only choice many countries will have. Here, we might see some if the economic recovery is not in fact as fake as some people think. But the bottom line is that there really hasn't been a serious attempt so far to create inflation in most of the world.

Yup.  Politicians are not economists.  And not all economists agree with each other anyway.  You have Krugtron the Invincible who thinks QEternity would cause inflation despite years of failing, then you have more sensible economists who think pro-growth policies would create inflation but nothing substantial ever gets pass the ignorant politicians.  Our biggest win since 2009 has been in allowing Joe Sixpack to legally invest in non-public startups at the end of this year.  That could jumpstart our economy and kickstart inflation.  Do not underestimate this "surprise factor".

In theory, the global debt problem is so big now which is why deflation is triumphing worldwide, but we've already repaired our balance sheet here.  With the rest of the world mired in deflation, it will eventually drag down the USA.  I think we'll get a safe haven bubble out of it for a while though, before the new world currency.  As the global reserve currency, we're gonna be mostly spectators as the globe goes up in flames.

The thing that keeps me awake at night is unlike 1933 there is no gold standard for the government to break the legs of deflation and restore normalcy.  What is our out this time?

My take is that "Krugtron" thinks QE is largely pushing on a string.  He has repeatedly stated that simply continuing QE and the like will NOT generate inflation.

[MachineGhost]

My take is that "Krugtron" thinks QE is largely pushing on a string.  He has repeatedly stated that simply continuing QE and the like will NOT generate inflation.

That's because he thinks we were in a liquidity trap as opposed to a balance sheet recession.  He would have to believe that because he's an Keynesian ideologue.  I wonder what his excuse will be if the economy does indeed recover after QEternity ended?

[moda0306]

I believe he thinks we are in a liquidity trap BECAUSE we are in a balance-sheet recession.  He often talks about a debt-overhang & the hangover that deleveraging causes.

Not necessarily trying to argue here... but I think your impression of his opinion (whether his take is right or wrong) might be a tad mistaken.


Backing it up a bit, Keynesians, as far as I understand, believe in balance-sheet recessions (and that we are in one).

[MachineGhost]

I believe he thinks we are in a liquidity trap BECAUSE we are in a balance-sheet recession.  He often talks about a debt-overhang & the hangover that deleveraging causes.

Not necessarily trying to argue here... but I think your impression of his opinion (whether his take is right or wrong) might be a tad mistaken.

Backing it up a bit, Keynesians, as far as I understand, believe in balance-sheet recessions (and that we are in one).

If that was the cause, why would he support more debt issuance?  He's not a Monetary Realist AFAIK.  Either way, the balance sheet recession is over, so there is no longer a liquidity trap if there ever really was one.

[moda0306]

MG,

Because "debt issuance" by any one party is a neutral net balance sheet event, and when the federal government does it, to the private sector, it's a positive balance-sheet affect.  That's right... debt issuance actually IMPROVES the private-sector's balance sheet.  And that's only the direct result.  The indirect result of more fiat assets on our balance-sheets is more nominal spending (because our savings stock is higher)...

The things that are net overall balance sheet effects are creating REAL wealth, which happens more consistently and abundantly when we are pushing our productive capacity to it's full-ish potential.

Obviously I don't expect you to take this all on faith or my word... but those who believe in "balance sheet recessions" are usually "New Keynesian" types or MR/MMT types.  They realize the federal government doesn't worsen balance sheets by issuing debt, that deleveraging has to occur, but that creation of new wealth & investment won't occur at nearly the rate it otherwise would if aggregate demand is far below capacity, which deficit spending helps mitigate by improving private sector balance sheets.

Sorry if that was all repetative.... I'm a little bit rusty on my MR.  We haven't had a multi-thread hijack debate on that in a while.

[MachineGhost]

Sorry if that was all repetative.... I'm a little bit rusty on my MR.  We haven't had a multi-thread hijack debate on that in a while.

I know all this, but I'm 95% sure that Krugtron the Invincible is NOT a MRer, so what you all wrote can't possibly be his rationale for the government issuing more debt when he thinks we're in a liquidity trap because of too much debt!  Keynesians don't buy into the "net financial assets" schtick.

Anyway, I think it is logically intuitive that the "mass default" will occur through double digit inflation.  Hussman believes inflation is already "baked in the cake" and will occur when the economy recovers (near the end of the decade, but I suspect that is because he is still waiting for the current half-cycle to finish) but I suspect his cake baking might rely on some kind of distortion of "QE causes inflation".  Then again, when you look at the ECM turning points, the end of the decade seems spot on:

[align=center][img width=800]http://i58.tinypic.com/9tiwc0.jpg[/img][/align]

BTW, Japan is expected to finally bottom on the 2016.825 turning point.  I'd really hate to calculate how many years of deflation that was.

[moda0306]

Paul Krugman quite often refers to Richard Koo's work, who is the founder of the term "balance-sheet recession."

Krugman may not be an MR'ist, but he's developed models that tell a largely similar story but coming from a very different direction.  MR & Krugman agree on a lot of stuff.  Importance of aggregate demand, economics of a "closed-system" and how that affects balance-sheets and income statements, how inflation rears its head in the face of high deficits and low interest rates.

There are some areas of disagreement, but for the most part, Krugman understands that newly issued debt is largely money we owe ourselves, and spurring aggregate demand is what is going to induce growth of non-financial assets (productive investment) to improve the "debt-overhang" in the economy.

Most of the people that use the term "balance-sheet recession" are in FAVOR of issuing more debt at the federal government level.  So I think your juxtaposition on this is off. 

[MachineGhost]

Okay, I'm not that well-versed in Krugtron because I loathe the guy.  Him sharing some of MR won't make me like him more.  He's a dishonest asshole who, unfortunately, has a soapbox.

[moda0306]

Okay, I'm not that well-versed in Krugtron because I loathe the guy.  Him sharing some of MR won't make me like him more.  He's a dishonest asshole who, unfortunately, has a soapbox.

Well I agree he's an asshole.

But he's right enough on some important topics that I value his perspective sometimes.

What are referring to with the dishonesty?  I think sometimes he argues in bad faith, but I don't necessarily call that "dishonest" so much as human nature.

[MachineGhost]

What are referring to with the dishonesty?  I think sometimes he argues in bad faith, but I don't necessarily call that "dishonest" so much as human nature.

Objective honesty doesn't seem to be a very high (if at all) virture with the guy.  In my view, someone with a national soapbox who is an economist ought to prioritize facts rather than political ideology and personal beliefs.  Just lay it out and let people arrive at their own conclusions, not tell them what to think.  He's not a politician who need the tenuous support of the people.

I'm fully aware of the sheer irony between how I write my posts and Krugtron likes to attack people he disagrees with.  If he is to really be believed, he allegedly only does it to shock people for the same reasons that I do.  Except he is a way more personal about it than in general, so it makes me suspect his inner motives.  Then again, maybe that's his pathetic attempt at contriteness for his long-standing assholish behavior and loss of position at Harvard.  If it takes one to know one, then I'm an asshole magnet!

[moda0306]

What are referring to with the dishonesty?  I think sometimes he argues in bad faith, but I don't necessarily call that "dishonest" so much as human nature.

Objective honesty doesn't seem to be a very high (if at all) virture with the guy.  In my view, someone with a national soapbox who is an economist ought to prioritize facts rather than political ideology and personal beliefs.  Just lay it out and let people arrive at their own conclusions, not tell them what to think.  He's not a politician who need the tenuous support of the people.

I'm fully aware of the sheer irony between how I write my posts and Krugtron likes to attack people he disagrees with.  If he is to really be believed, he allegedly only does it to shock people for the same reasons that I do.  Except he is a way more personal about it than in general, so it makes me suspect his inner motives.  Then again, maybe that's his pathetic attempt at contriteness for his long-standing assholish behavior and loss of position at Harvard.  If it takes one to know one, then I'm an asshole magnet!

What are referring to with the dishonesty?  I think sometimes he argues in bad faith, but I don't necessarily call that "dishonest" so much as human nature.

Objective honesty doesn't seem to be a very high (if at all) virture with the guy.  In my view, someone with a national soapbox who is an economist ought to prioritize facts rather than political ideology and personal beliefs.  Just lay it out and let people arrive at their own conclusions, not tell them what to think.  He's not a politician who need the tenuous support of the people.

I'm fully aware of the sheer irony between how I write my posts and Krugtron likes to attack people he disagrees with.  If he is to really be believed, he allegedly only does it to shock people for the same reasons that I do.  Except he is a way more personal about it than in general, so it makes me suspect his inner motives.  Then again, maybe that's his pathetic attempt at contriteness for his long-standing assholish behavior and loss of position at Harvard.  If it takes one to know one, then I'm an asshole magnet!

Well facts are pretty useless in economics if you can't put them together into a narrative of cause and effect.  Do I think he pre-supposes his subjective preferences too often, or use cherry picked facts?  Sure.  But his analysis of economics, as often flawed as it might be, is a lot better than most out there, and he DOES bring a lot of facts to the table with which you could try to come to different conclusions if you wish.  But most people don't.  They just trash the dude. 

There's a reason MR'ists don't like trashing him.  He's mostly right on macro and brings a wealth of much-needed good analysis to the table against the faux deficit hawks that have 2/3 of the country convinced we're headed for a fiscal catastrophe, and 1/3 of the country convinced that the cure to it is tax cuts and spending cuts.

[murphy_p_t]

The thing that keeps me awake at night is unlike 1933 there is no gold standard for the government to break the legs of deflation and restore normalcy.  What is our out this time?

per jim rickards, repeg to gold at a much higher value, say $8000/oz

[MachineGhost]

per jim rickards, repeg to gold at a much higher value, say $8000/oz

I don't think you can bring a peg back where one no longer exists?  How would it have any effect?

[murphy_p_t]

the basic gist, as i understand it...repeg to gold to effectively write down unserviceable debts (inflate away debt burdens), recapitalize banks...central bank / govt still in control as its holding lots of gold. Will need to be done when/after confidence in gov't currencies is lost. Probably involves windfall profits tax on sellers of metals.

[moda0306]

I don't think any of the economists with much of a national soapbox do what you are advocating.  Roche often says that economics is politics masquerading as science, and I generally agree.

I agree.  And furthermore, there are all sorts of philosophies masquerading as science.  To be scientific sounds cool, but it pays to look under the hood of some of this "science."  Much of it looks more like someone arriving at a conclusion, followed by a frantic search for "scientific" evidence to back up the conclusion.

Any time you have to run on "natural experiments," rather than rely on controlled experiments with very easily observable physical effects, the more room for different interpretations of data you are going to have, and the more room for manipulation of data to serve a political/social/religious (sorry... had to put that last one in there) preference you're going to have.

We probably disagree on the details of certain conclusions in this arena, but I will certainly agree with you... this area is fraught with manipulation.  Whether it's Dr. Oz, the federal government, some church, the oil industry, or your bleeding-heart liberal wacky aunt... statistics and quasi-scientific analysis that relies on natural experiments or not-so-iron-clad social experiments that misinterpret cause-effect or causation/correlation nuances.