Will they try to inflate away debts or default?

Discussion in 'Economics' started by Dharmakaya, Jun 2, 2010.

  1. What do you think? Will they print and print?
    Will not the result be that interest rates go up even more than inflation as it takes then even higher inflation to pay for future loans? A vicious circle that easily goes out of control.
    If they can´t fool everyone somehow..


    "You’ve likely read in the press about debt to GDP figures like 200 percent for Japan, 115 percent for Italy, 113 percent for Greece, 85 percent for the U.S., 76 percent for France, 73 percent for Germany, or 70 percent for the UK.

    These are dangerous levels, although not outrageous ones. But government officials don’t tell the whole story; they sugarcoat the real dimension of the over indebtedness.

    That’s why you need to understand …

    Explicit Versus Implicit Debt Levels

    Explicit debt leaves out important obligations like pensions and social security. If you add these in, you get what economists call the implicit government debt.

    And if you use the implicit government debt to GDP ratio, the picture is much bleaker. Look for yourself:

    Germany: 255 percent

    France: 255 percent

    UK: 530 percent

    U.S.: 570 percent

    This is frightening, indeed. These obligations are unbearable. Which means governments all over the world will have to break many of the promises their predecessors have made to get elected.

    There are ways to get out of too much debt. The first is by …


    When you default, you sit down with your creditors, and restructure the debt. Creditors have to take the losses, and rightly so. They consciously took on this risk to earn a profit. Yes, they made bad decisions. But that’s the way capital markets function.

    Governments around the world will inflate their way out of debt.
    And tinkering with this process leads to bad capital allocation, an inefficient economy and less growth.

    Another way out is to …

    Crank Up the Printing Press!

    Most modern governments have a trump card many ancient governments would have died for. They reign over fiat currencies, which can be created by the stroke of a computer key. As Ben Bernanke once said so famously:

    “But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

    Therefore, modern governments with a printing press can bail themselves out of all debt problems. And I believe they can and probably will inflate their way out of today’s debt problem. They’ll pay back their debts nominally, with money that’s worth less. But they will not have to default.

    Unfortunately, at the end of this road, the bond market and the currency will be destroyed. I don’t know how far our politicians will go in the coming years. Although I fear they will go this bitter way to its very end."