Wednesday, April 15, 2020

Debt… more Dark Winter

I don’t pretend to be an economist or anything remotely close; no, I am more about the basics of economy: saving and spending and the other simple metrics of money. 

The Great Depression was not caused by a faltering stock market, no; it was about international loans that went bad, the borrowing nation states in default.  Yes, the default on debts were the primary cause for the Great Depression of the 1930's. 

Flash forward to the recent and now, U.S. debt is unprecedented ….  The U.S. historically went from a great creditor to the greatest debtor in all of history and this, coupled with the breadth and dept of international debt, is about to cause a crash of no comparison. 

Some that seem much more able to speak on this, those who deal in investing and such, say that a great deleveraging, the rapid selling of assets to lower debt,  is coming  In my simple way of trying to understand this, the reality is that debt cannot continue indefinitely; that eventually, either the borrower must make good, or the creditor must attempt to recover some portion or otherwise write-off these supposed assets, the loans, gone bad.

In a deleveraging, all Hell breaks loose: credit dries up and spending drops, the realistic markets falter and finally, folks feel poor or poorer.  Moreover, the lowering of interest rates (interest rates presently at an all time low for an all time period), does not work; indeed, low interest rates are no longer the silver bullet. 

Debt must be diminished and to that, one or more measures are taken:
1. Reduction in spending (austerity)
2. Defaults…restructuring
3. Redistribution of wealth from the few to the many (counter to what has been going on)
4. Printing of “new money” by the FED

As to #4, well, this has been done to death and so, as with debt, it may reach a point of no return so to speak.  Continuing, #1 exacerbates (rather than alleviates) the problem, while #2 begets more defaults, panic and bank runs.  Finally, #3 is possible only when the government begins to redress the wealth imbalances and, through fiscal policy, puts in place the basis for a more equitable distribution and accumulation of wealth. 

Needless to say, the wealthiest will not like #3 and, given their apparent power, will do everything to stop it from happening. 

No comments:

Post a Comment