For most folks, the biggest issue isn't "debt vs. disposable income", but rather "debt SERVICE vs. disposable income"..
I agree. But what about politicians? Most will spin, play-down, and promise a 'quick fix' to get elected. That's the problem. It's not the voters can't understand the issue. It's that most politicians will lie about the severity of the crisis to ensure their marketability. Who wins the election? The guy who promises a certain Depression? Or the guy who promises to avert one? Economics is a gray-science, afterall. The public is easily fooled on details, and politicians want a job. Doom and gloom doesn't win elections.
The problem is Western economies levered up to the cliff together. Japan is the only economy that passed "zero barrier" before us. And the only reason they didn't crash like a mofo - America, Europe and the rest of the G20, still had consumptive power to buy their excess capacity. What happens when Europe, America and Japan all get flushed together? No one country can prop us all up, like Japan was held up by us. China is too small. They can't do it. Not by a long shot. So in that regard, no, the market will not be forgiving in the slightest. Debt service payments have to be made, or we default, and private capital dumps bonds, yields go north of 15%, etc. Deflation at this level of Federal debt, at interest rates that high (15-20%), done. Greatest Depression ever. Bernacke will never allow that to happen. They'll do everything in their power and print us to the moon.
If hyperinflation gets rolling, Bernanke is powerless to stop it. In fact, all they are doing today is SUPPORTIVE of hyperinflation... countered by deflationary forces of excess capacity and cheap labor. "Printing us to the moon" won't solve anything... may give us a different set of problems, however. Like WORTHLESS CURRENCY... see, Zimbabwe, Weimar Germany, Turkey...
Oh I agree completely. We're done and done. Either way (inflation or deflation), we're due for a Great Depression. Whether it's worse than 1930's, is up to bubble Ben. The rosiest scenario might be 500 S&P , real estate down another 50%, unemployment @ >25%, slashed Government programs, for 3-4 years. Then slow recovery from crushing debt service. It's that, or we inflate the currency into toilet paper. All prospects of normalcy in this generation (next 10-20 years) are thrown out the window. Who the fuck knows what America will look like. Not pretty. All Washington has done is push back judgment day another 1-3 years. The trail balloon to nationalize 401K's does not bode well, at all. They know the debt market is toast, China is about to walk, and need to stave off a currency collapse with our retirement accounts. Either that, or Bernacke just prints and we get hyperinflation now, rather than later. This is off the charts.
I agree wholeheartedly with everything you say. Do I think that it is fair that the US market collapses because of it's debt load? Yes. And I'm American. We have irresponsibly indebted ourselves beyond the point of no return. However, do I think the world wants that? No. It's very telling in how everyone flocked to the US dollar as the US financial companies started to collapse. It's the equivalent of a horse running into its burning stable because it doesn't know any better, and associates the stable with security, regardless of the fact that it itself is on fire. Until someone comes up as an alternative that the world will flee towards for stability, the US dollar will remain king, and that will keep interest rates low, regardless of the debt level. I do realize that the BRICs are conspiring to topple the US dollar somehow in terms of reserve currency status, and move to a basket of currencies. Right now, no one is in a position to replace the USD, because no one is as stable, and the US has a history of rebounding from crises better than anyone else. To echo Jon Stewart, it's the thinnest kid at fat camp. Even if China may technically have a stronger economy, they don't have the same reliability and transparency (not that the US is any better these days, but at least there's the illusion). The only alternative is going back to the gold standard, which is very very unlikely, due to the ramifications it would have on world trade. If the USD remains the reserve currency, the world has a vested interest to make sure the US markets remain solvent.
First of all, you can't lump the entire G7 together and say "here you go, G7, this is the solution." Each country has to come up with their own solutions as they all have unique problems. Canada, for example, has completely different issues to deal with than the USA and will have a much easier time clearing the debt. Some countries may default, and some may create solutions that work. Fortunately, for my sanity, I don't believe that the world's major economies will suddenly implode and cause the world to come crashing down upon us. I suppose anything is possible, but it's an extremely unlikely event.
What makes you think that the tools at the central bank's disposal for printing money are sufficient to counter deflation? Quantative easing, government bailouts of private corporation and economic stimulus packages have all been tried in Japan. It didn't work. It won't work in the US either.
But the flight-to-quality argument assumes quality will always be there. What happens when Bernacke monetizes an ever growing share of bond auctions because our largest trading partners are either too broke (Europe/Japan), or unwilling to throw good money after bad? At some point, China/Japan will balk at this charade and Bernacke will have to step-in and fill those shoes. That pushes legitimate capital out of bonds and into commodities. Even if the world continues to finance 1.8 Trillion dollar American deficits plus debt service approaching 700 Billion @ ~0% rates, what happens to commodities, energy and food prices if and when we get a recovery? Then what happens to bonds??? It's a death blow, man. We've painted ourselves into a corner. Either rates stay low indefinitely via the FED or legitimate buying, and commodities skyrocket, kill growth/revenues, bonds sell off from massive inflation and the dollar crashes. Or, we get a sell-off in bonds, then FED intervention, then a dollar crisis. Either way, we get a currency crisis from loose money, and things explode. We're at ~80 oil and barely in recovery !! The flipside, is higher rates and unsustainable debt service = monetization and crash. There's no way out except revolutionary technology like electricity, or free energy. Which I don't dismiss as the Americans are total cowboys when it comes to finance. State-side deflation isn't an option for Bernacke. If we experience deflation, the entire house of cards comes down from revenues and asset values. The only option is inflation. Which is apparently what all signs are pointing to. I honestly don't see how we can escape this.
Not the detailed explanation I had hoped for. G7 problems are fundamentally similar. Too much debt, that, when reset to higher rates, are totally unserviceable given current revenues. So how do they make up the short-fall? Tax, print, or borrow. Borrow is off the table. Tax or print. Tax equals deflationary Armageddon. Print is what Bernacke is schooled in. "Competitive devaluation" is the order of the day. Commodities go to the moon and the nations salary gets halved. That's a best-case scenario. Major economies imploding is not a unlikely or infrequent event. Argentina, Iceland, and Japan. Europe and America are next.