Thursday, January 29, 2009

The Economy: What's Next?


Some perspective from Martin Wolf of the (London) Financial Times:

“Let us start with some facts. The ratio of US public and private debt to gross domestic product reached 358% in the 3rd quarter of 2008. This was much the highest in US history. The previous peak of 300% was reached in 1933, during the Great Depression

“Nearly all of this debt is private. That reached an all-time high of 294% of GCP in 2007, a rise of 105 percentage points over the previous decade

“Particularly remarkable is the composition of the increased debt. In the early 1930s, most US private debt was owed by non-financial companies, so balance sheet deflation occurred in companies, as was also the case in Japan in the 1990s. This time, however, the big increase in debt was in the financial and household sectors.

“Over the past three decades the debt of the US financial sector grew six times faster than nominal GDP. The consequent increases in its scale and leverage explain why, at the peak, the financial sector allegedly generated 40% of US corporate profits....

“Household debt – most of based on rising housing values – rose from 66% of US GDP in ’97 to 100% in ’07”

Note the implication: balance sheet deterioration will occur in financial and household sectors, unlike during the Depression, which largely affected (non-financial) companies.

Need proof?

Why do you think TARP exists? To shore up the deteriorated balance sheets of banks!

And after The Inflation?

“If central banks and governments are aggressive enough, they can generate inflation which will lower the debt burden,” Wolf writes. “But they will imperil – if not terminate the experiment with un-backed fiat (or man-made) money that started in 1971.”

Now it's a tossup.

Buy Ammo? Buy Gold? This is a tough choice.

Despite that, Wolf prefers inflation.

“Inflation will allow debt to reduce day by day. Price rises will make companies going concerns, earning their way back to profit. Pay rises will enable households and consumers to pay down what they owe while saving more and spending some. And inflation allows interest rates to rise but still remain negative in real terms. It is healthier that people receive an annual pay rise than take out an extra annual loan – as they have been doing since 2000. This package will allow markets to breathe again.”

Which is precisely the direction the Gummint has taken.

Liquidation, of course, is the best alternative, and will NEVER be undertaken by the goons in Washington, unless it's 'liquidation' in the sense of the way the Kulaks understood it.

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