JZ
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Europe decided against the only possible workable arrangement when it decided against a fiscal union. Then again I suppose the member countries decided against said union because it could never be workable in the first place, such as it is in the United States. At any rate it’s only a matter of time before the EU disintegrates. The only question is when? Any guesses?
Thanks for the response, Stoneleigh.
The herd seems to be getting happier though:
Global competitive devaluation has kept currencies relative to each other more or less stable in spite of global monetization. This competitive monetization in part explains the rise in commodity and equity prices, and thus the inflationary movement subsequent to 2009. In other words, as long as the global CB’s continue to print in their various ways, prices can continue to rise, even in the face of deflationary forces. Anyone who argues against this fact has the price action of the last 3 plus years working against their argument. How much longer these inflationary events can persist is an open question. Given the austerian politics in Europe and the U.S. I’d wager we are getting close to the end of the line, however. Austerity is killing the golden goose in Europe. If that meme catches fire in the U.S. (fiscal cliff nonsense) then the tepid recovery here is all but over.
There is one significant difference between the monetary systems in the U.S. and Europe: one is a currency issuer and the other a currency user. I know this is basic stuff, but nonetheless very important to understand. The currency issuer has the ability to inflate (print) its way out of the debt overhang, the currency user does not. The question then is will the currency issuer print its way out of the debt overhang?
That isn’t so easy to answer. In the U.S. there has obviously been incremental balance sheet repair at the consumer level through defaults and or paring back spending, to where now consumer debt levels are back to 2000 levels.
Is there a mechanism that would allow these consumers to ratchet up spending again? In other words can a dose of deregulation kick start easier credit terms circa 2002-2007 with a Romney election? I don’t know exactly what the future holds for those in the states, which should no be confused with what awaits those in Europe. I do think, however, that there are mechanisms in the U.S. that auger for a much slower collapse scenario (a muddle through event) than for those across the pond. I don’t see hyperinflation manifesting itself here but I sure don’t believe it’s axiomatic that we get a second financial collapse either.
Variable81,
I’m not dogmatic regarding possible solutions. I pretty much agree with what’s been laid out by stoneleigh and Ilargi. There has been no hyperinflation, and I see no mechanism whereby we’ll see anything resembling it in the future.I don’t, however, shy away from exploring any action which could mitigate the pain for the masses going forward. As such I don’t much care about the highly questionable moral arguments lobbed about in respect to debt forgiveness of some kind, especially when said debt was encouraged by the very government supposedly charged to look out for our best interests. The fraudulent lack of oversight by regulators alone, which allowed said bubble to grow kind of eliminates any moral component regarding consumer debt accumulation, especially in housing. Bill Black calls what happened a criminogenic lack of oversight at the highest levels of government. He understands that mortgage forgiveness would benefit many unscrupulous speculators, but that would pale in comparison to the many folks who have been collaterally damaged through little fault of their own. This form of jubilee would be only one part in a larger conversation on our living arrangement going forward. I believe structural changes are a must going forward too. I like Michael Hudson’s ideas here, which essentially emasculates the extractive forces behind the FIRE economy. At any rate, the problem facing us is clear as day. For me, at least, it’s time to move on to practical and realistic solutions to the mess we find ourselves in. Punishing the victim isn’t one of them.
Good god, Denninger is an unbalanced extremist crackpot. He prescribes cutting all deficit spending. I’m sorry but that is positively insane in a deflationary event like we are experiencing.
stoneleigh said, “Bailouts are never for the little guy. The creditors hold the political power and write the rules. They will not allow debtors off the hook. Instead of repayment in money, they will take people’s freedom instead, making debt slavery much more real than it is today. Debts will not be forgiven, but sold on to more aggressive debt collectors. “
I don’t think your premise here that debts will not be forgiven is ironclad. In Europe you are probably correct, but in the US I am not so sure. Still, I agree that the safe bet is that consumer debt will not meaningfully be forgiven, BUT if it is meaningfully forgiven then what?
Variable81,
There is already target debt forgiveness. Increasing the depth and breadth of the forgiveness to help more debtors is a good and just move. Repairing mortgage debt alone would go a long way to getting consumers back on their feet. The losers would be the big money banks along with taxpayers vis a vis Freddie and Fannie. The banks can go in receivership. No biggie. The government can write off the its loss with the stroke on a keyboard. The healing can begin.
I think the Times article grossly understates the problems facing the consumer going forward in this deflationary spiral. This paragraph of theirs is plain wrong:
“And write-offs big enough to change consumer behavior would probably be big enough to destabilize banks. The Federal Reserve or the government would need to help, presumably by injecting newly printed money as capital. Such government control is usually inefficient, and abundant printing of money increases the risk of uncontrolled inflation, which has its own way of making people feel poorer.
That’s neoliberal nonsense. Destabilizing banks would not be the end of the world as Hudson and others have pointed out. Uncontrolled inflation is the least of our problems too. And uncontrolled inflation is not a necessary result of debt forgiveness. “Usually inefficient” is no argument when being faced with the biggest debt deflation in our time.
Also the moral hazard argument can be handled with strict regulation going forward. So, yes, we’d get slower growth under this umbrella, but we’d also move forward instead of backwards which is preferable to what lay ahead if we do nothing. Furthermore, do these authors feel the same way about the moral hazard attending bank bailouts?
I meant that another way outside of debtors getting a clean bill of health would be what’s been happening since 2007, where creditors have been bailed out and debtors remain on the hook. That way is sure to fail us all. The former will, however, put us on the road to some form of recovery. I’m not sure if a middle ground approach will work, however. It will buy us time though.
Debt destruction has to happen one way or the other. It can happen where debtors are freed from their obligations or it can happen that wreckless creditors take losses from lack of due diligence and the government steps in to stop the bleeding. That can much more easily happen in the USA than in Europe monetary union.
Variable81,, debt destruction and debt forgiveness are very different. Forgiveness repairs the balance sheets of consumers and would act as a driver for demand going forward. Debt destruction is the other side of the coin and affects creditors not debtors. That part of the equation, as Michael Hudson and MMT’ers point out, is a palliative that can work, albeit imperfectly. Still, it’s preferable to allowing creditors cart blanch over debtors.
Many in the MMT crowd do not see an insurmountable problem here. At the very least they do not see the government debt overload as anything resembling household balance sheet dilemmas. You could have targeted debt forgiveness along with aggressive and consumer targeted stimulus filling in where consumers can’t, and thus a slow reflation that repair aggregate consumer balance sheets could conceivably stop the deflationary forces in their tracks, while still leaving stock markets buoyed. Bad banks could be wound down, replaced for a time by government charted banks that have the public good at heart. Doesn’t mean it will happen this way but it COULD play out like this, and if it did, while not being a perfect panacea, it could buy us a considerable amount of time.
Yes, reflation is inflation by another name. It is not, however, hyperinflation.
On another note, there is a remote possibility for some form of debt forgiveness. If that were to happen on a large enough scale then consumer balance sheets could be repaired enough to rejigger an inflationary bias going forward. I like Michael Hudson’s prescriptive ideas to get us back on a health track by taxing land rents. I know it’s a long shot but were it to happen then I believe this deflationary event could be stopped in its tracks for good. Might be a long shot, but it does allow for another outcome out there that isn’t Apocalyptic.
