As the ominous example of Japan shows us, soaring debt levels (resulting from fiscal stimulus and low growth) and financial forbearance (socializing private losses) is not a recipe for economic success. FULL ARTICLE by Marius Gustavson
Source link: http://archive.mises.org/12102/the-global-debt-crisis/
The Global Debt Crisis
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Excellent article, Marius. Thanks for linking to CNBC’s credit default risk ranking; I was particularly entertained by Iraq’s position as 7th most likely government to declare bankruptcy. So much for stabilizing Iraq, right?
In “The World Is Curved,” D. Smick argues that Japan continues to suffer from economic problems because during the recession in the early 1990s, the central bankers hesitated to lower interest rates in order to dampen the effects of a deflating bubble economy. By not acting quickly enough, he asserts, they squandered the opportunity to fix the problem before it became unfixable.
The insight offered in this article adds up to make more sense to me. The notion of a central bank being capable of and even adept at optimizing economic health to the benefit of the masses is totally absurd. I only wish that the rules of the status quo did not apply in this case, so that the burden of proof did not fall on free marketeers to prove that the Fed is destroying our economy and our liberties, but on the Fed itself to prove that it is not destructive and therefore dispensable.
Gradually or rapidly, interest rates will rise significantly rewarding savers. High borrowing costs could trigger sovereign debt defaults in Europe, the US and Japan. Savers should now be receiving 8-12% interest on their money to compensate for its loss in purchasing power. As governments resist the rise in rates with manipulations they set in motion a long term trend of ever rising interest rates. The US government can delay and hide the rate rise, but cannot prevent it. When interest rates double, stock values will plummet and P/E ratios may revisit single digits again. The housing market will collapse further. If that debt is pushed onto the US federal balance sheet, the dollar will collapse.
Americans must elect politicians who will cut federal spending strengthening the dollar. Voters are not quite ready to do this now, but they might be willing to reduce spending in 5-10 years. More likely, high interest rates and high inflation will make the choice for them.
A double-dip recession would be the best possible outcome and is not very likely. The U.S. shows no consensus, either from politicans or the electorate, to cut spending. The Big Government lobby has successfully made everyone in the U.S. dependent upon government spending in one way or another. Without making this comment too long, the problem is endemic to a fiat money system. The government has created a gigantic tragedy of the commons, and the people know it even if they do not know its name. Everyone has his hand in the cookie jar and no one wants to be the first to take out his hand.
This is a wonderful opinion. The things mentioned are unanimous and needs to be appreciated by everyone.
Debt Tips
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