Sunday, January 1, 2012

A Very Sophisticated and Thorough Analysis of the Global Debt Problem

In the excellent link below, four main scenarios are identified as plausible ways out of the crushing debt that impedes the business environment in the United States:

1. Save and pay -- In theory, this seems the most sound and sane approach.  Work harder and save more. But  of course this also means "spend less", which reduces economic growth especially in the EU, the U.S and Japan. The more limited the growth, the longer it will take to break the public and private debt cycle.

2. Grow our way out it -- This also is appealing and probably the most optimal of all and may very well be a  major part of what drives down debt in the long run. The problem is with aging populations  and inflexible labor markets in the EU and Japan, the broader macroeconomic trends, even before the debt crisis, was a steady dose of slow growth in both these economic blocs.  Due to slightly better birth rates and still a large number of immigrants, along with a more dynamic labor market and a still innovative culture, the United States is far better situated in my view to "grow its way of it".  Still, two problems however for the United States : a) the magnitude of the public and private debt, including unfunded obligations such as medicare, prescription drugs and social security total approximately $120 trillion, or almost 10 tens current U.S. GDP; the amounts may be too staggering for even a reinvigorated, turbo-charged U.S. to overcome; and b) even if all this can somehow be overcome, the current prognosis for the EU and Japan is so grim that they will likely bring the U.S. down with them for at least the near and medium terms.

3. Debt write-offs and restructuring -- This may be the swiftest approach yet. The question is who will be the biggest losers?  As points of reference, just ask the bondholders of GM and Chrysler. There is already talk in the EU about the imposition of a one-time "wealth tax", a 10% or 15% tax on one's net worth.  Something as Draconian as that would almost surely result in severe capital flights, social discord and political upheaval; basically the sort of stuff that in the past, Revolutions were made of.

4. Inflation -- At this point, a relatively modest inflation rate of 4% or 5% may actually be desirable. The concern of course is once people lose confidence in the currency, then all bets are off and we could find ourselves with similar low double digit rates seen in the Ford and Carter years -- or Heaven forbid, far worse.  The Mauldin article relays the following eye-popping data, which supports the possibility of not just Carter-era inflation, but something resembling hyper-inflation:   "Today the velocity of money in the U.S. is at an all-time low of 5.7. If the number of times a dollar circulates per year to make purchases returned to the long-term average of 17.7, price levels in the U.S. would rise by 294 percent over that period—unless the Federal Reserve simultaneously reduced its balance sheet by $1.8 trillion."

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