Cyprus has beat Italy to officially become the fifth eurozone bailout nation after Ireland, Portugal, Greece and Spain…but Spain is the one causing the most anxiety because it’s economy is Europe’s fourth largest – larger than the other four euro bailout sisters combined….Sadly, judging from the current debt situation (see graph below), the Euro bailout train most likely will not stop here [and, as a result, we are in for years of eventual de-leveraging, likely deflation and sovereign declines. Let me explain.] Words: 485
So say edited excerpts from a post* at www.EconoMatters.com.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
In the not so distant future almost all countries in the world could end up in one of three classes due to decades of deficit spending:
- credit counseling or
- debt renegotiation,
That also means many nations, after the storm of debt/banking crisis, will need to implement various government austerity programs, and households will commence debt deleveraging–a long and painful process….
The Deleveraging Cycle
Using the previous deleveraging cycle of Sweden’s and Finland’s post financial crisis during the 1990s as a baseline, McKinsey compared the current progress of the U.S., the U.K. and Spain.
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What KcKinsey found is that the United States may have been half way through that process, while households in Spain and the United Kingdom have only just begun to deleverage. (see chart below).
a) U.S.: McKinsey reckons the U.S. could return to trend as early as mid-2013, but cautions:
“… after US consumers finish deleveraging, they probably won’t be as powerful an engine of global growth as they were before the crisis. That’s because home equity loans and cash-out refinancing, which from 2003 to 2007 let US consumers extract $2.2 trillion of equity from their homes—an amount more than twice the size of the US fiscal-stimulus package—will not be available.”
b) Spain: More despair would come to Spain:
“….Today, Spanish corporations hold twice as much debt relative to national output as do US companies, and six times as much as German companies. Debt reduction in the corporate sector may weigh on growth in the years to come.”
c) U.K.: The prospects of the U.K., even though not part of the Euro sovereign bailout discussion yet, is not that much better:
“….we find that the ratio of [UK] household debt to disposable income would not return to its long-term trend until 2020.”
Is a Deflation Cycle Next?
What’s more, “Significant public-sector deleveraging typically occurs only when GDP growth rebounds, in the later years of deleveraging.” As such, since today’s deleveraging economies are larger and under more challenging circumstances, the current deleveraging process could take longer than the historical experience of five to seven years from Sweden and Finland, in McKinsey’s baseline suggesting that the world, most likely, could experience a long deflationary period although, in our opinion, not a Japanese-style one due to Japan’s unique demographics, banking and government systems.
[Nevertheless,] we do think darker days are ahead, and America’s lost decade would at least get an extension.
*http://www.econmatters.com/2012/06/after-sovereign-debt-crisis-comes.html (To access the above article please copy the URL and paste it into your browser.)
Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
We’re coming to the end of government’s ability to borrow money to fund current spending that’s beyond the growth of their economy….and I actually find that massively bullish because that government funding misallocates capital. It’s going to end in the next 2 or 3 years, Europe first, then Japan, then the US….
…The US Government and its catastrophic fiscal morass are now viewed by the world as a ‘safe haven’. This would easily qualify for a comedy shtick if it weren’t so serious….[but] the establishment is thrilled with these developments because it helps maintain the status quo of the dollar standard era. However, there are some serious ramifications that few are paying attention to and are getting almost zero coverage from traditional media. [Let me explain what they are.] Words: 1150
Jim Sinclair is now warning… that ‘The end is not near, it is here and now’ in reference to the global financial system…[and] reiterating his long held view that there will be “QE to infinity” despite the denials of Bernanke and other central bankers. [He also has some interesting things to say about gold and alarming things to say about the euro. Read on.] Words: 305
“The financial markets continue to show extreme volatility as the various institutions and governments deal with the end of their respective roads….Governments, economies and societies are converging on a common dead end, and it is a dead end of historic proportions….There will come a moment when this dysfunctional system can be sustained no longer. It is not inevitable. There is still time for rational behavior and solutions, but that time is short.”
“Either you take the debt clean-out right away, and that means a very hard deflationary depression, or you do what I suspect they will try to do and that is keep pumping money into the system to keep the whole banking (system), derivatives and economies afloat [and] that will lead to some sort of monetary distress that could end in hyperinflation. I think that’s the worst outcome, but there is no good outcome.”
Even as I write these words, the world’s largest economy — the E.U. — is coming unglued at the seams, the world’s second largest — the U.S. — is careening headlong toward a fiscal cliff that promises to gut its GDP, nearly all of Asia — including Japan, China and India — is slowing…and yet most investors still don’t get the message. [Let me go on to explain just what that message is.] Words: 1357
Why are both debtors and creditors willing to build a status quo of massive unprecedented debt? [After all, the delusions of] creditors that debt is wealth and should never be liquidated, and of debtors that debt is an easy or free lunch have been smashed by the juggernaut of history many times before…[and] I think they will soon be smashed again. [Let me explain.] Words: 1150
The deficits aren’t going to stop anytime soon. The debt mountain will keep growing…Obviously, the debt can’t keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things….The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for….[and] the Federal Reserve will hear their prayer. When will the economy reach the wall toward which it is headed? Not soon, I believe, but in the meantime there will be plenty of excitement. [Let me explain what I expect to unfold.] Words: 1833