Summary: One in a series of thought-starters about this era, the end of the post-WWII era. A harsh but accurate analysis of the lust for savings and austerity that has — too late — gripped the West. And a pessimistic forecast.
Excerpt from Global Macro Investor, Raoul Pal (an A-team hedge fund manager), June 2010:
Budget Deficits — missing the big picture
All this nonsense about focusing in on bringing down budget deficits is just trying to stick a plaster on a mortal head wound. There is simply no room for another recession. If there is a recession, which I think is highly likely, then the deficits will explode further and it’s game over because there are no monetary policy tools available except for the highly unproven QE {qualitative easing}, and not enough creditors to buy the debt. Sovereign default, here we come.
Austerity measure will insure default
The second major problem with the IMF method is that it imposes austerity measures on the country in question to rein in spending and increase tax collection. On paper it sounds great but it is hopelessly idiotic. The problem is private sector debt, and an austerity package will just mean that the private sector will definitely bow under the weight of taxes and lower spending, and government will have to bail them out. Sovereign default, here we come.
No way out
So what’s the way out? Err, there ain’t one. It’s game over.
Pal is über-brilliant, but this is excessively pessimistic (IMO).
First, economic impacts are largely a function of the rate of change. Working off the excess total (private plus public) debt over a generation would be painful. Debt deflation over ten years might be terminal for western governments (but not our societies).
Second, monetization of the debt (sustained qualitative easing) is untried but theoretically possible. Monetization of debt has almost no immediate consequences during a recession, where there is surplus labor and industrial capacity. The severe hangover — inflation — comes during only during the recovery. It’s the price of successfully managing to work off excess debt. In theory the only limitations on the ability of government’s to monetize debt is doing so to the point where:
- the currency collapses (more likely when a nation relies on foreign funding, like the USA), or
- social cohesion implodes, and the government can not internally fund the debt.
In this, as in so many things, social cohesion is the key factor. Domestic debts are a zero-sum factor within a society. The problems result from the unequal distribution of debt and wealth, encouraging people to see themselves as winners or losers independent of the overall national success. That’s usually a delusion, one that leads to disaster only over a few generations. Our Latin American brothers proved this beyond any doubt during the 20th century. “Rich as an Argentinian” they used to say; nobody says that today. Class warfare is lethal, which is why Solon the Lawmaker is the true founder of Athens’s greatness.
For more about this see this FM reference page: Financial crisis – what’s happening? how will this end?
Posts on the FM site about forecasts and warnings
- Geopolitical implications of the current economic downturn, 24 January 2008 – How will this recession end? With re-balancing of the global economy — and a decline of the US dollar so that the US goods and services are again competitive. No more trade deficit, and we can pay our debts.
- What will America look like after this recession?, 18 March 2008 — The recession will change many things, from the distribution of wealth within the US to the ranking of global powers.
- Consequences of a long, deep recession – part I, 18 June 2008
- Consequences of a serious US recession – part II, 19 June 2008
- Consequences of a long, deep recession – part III, 20 June 2008
- Forecasting the results of this financial crisis – part I, about politics, 13 October 2008
- Forecasting the results of this financial crisis – part II, a new economy for America, 14 October 2008
- A look at out future, 2009 – 2010 … and beyond, 9 November 2008
- America on its way from superpower to banana republic, 28 March 2009
- About the coming crisis in public pensions, FM website, 8 January 2010
- Would a default by the US government help America?, 21 February 2010
- Can Obama turn America into something like Zimbabwe?, 22 February 2010
Afterword and contact info
- For more about this website, see the About the FM website page.
- You can subscribe to receive posts by email; see the box on the upper right.
- Contact us (WordPress keeps your contact information confidential):
