Should we be concerned when tepid economic growth and low inflation are accompanied by increasing public and private debt? Are we borrowing just to stay alive? [As I see it,] national governments will increase national debt loads in order to stay in power until one or more of them default. Then their will be financial panic which will most certainly be deflationary. Here’s why.
So writes Ronald R. Cooke (tceconomist.blogspot.ca) in an article* originally entitled What Are The Odds in 2015: Inflation or Deflation? – The Case for Deflation., going on to say:
According to the OECD:
- Japan’s “official” debt to GDP ratio is projected to be 232% in 2015,
- followed by Greece (188%),
- Italy (147%),
- Portugal (142%),
- Ireland (132%),
- France (116%),
- Spain (111%),
- the United States (107%),
- Belgium (105%), and
- the United Kingdom (103%).
As shown in the following graph,
- the 15 country Euro area has a debt to GDP ratio of 107%, and
- the total average debt burden for all OECD nations is 111%.
- These “official” debt burden numbers do NOT include
- forward spending commitments for promised welfare payments,
- “off the books” public debt, or
- the effect of higher interest rates on public debt service.
There is NO credible plan to pay off these debts. The bubble just keeps getting larger, and larger….
We don’t know how long it will take for this scenario to play out but if the world economy unravels, then:
- unemployment, underemployment, and fear will combine to reduce consumption,
- investment and GDP will decline and the economy will deflate just like in the 1930s:
- fixed asset values will decline,
- rental properties such as homes, apartment buildings, shopping malls, and so on, will face potential bankruptcy because of higher vacancy rates and it will also become increasingly difficult for rents to keep up with property, debt, tax, and maintenance costs,
- incomes will stagnate,
- unemployment will increase,
- credit card debt will cause consumers to prioritize spending decisions based on urgent need: food, fuel, and then rent (or mortgage payments),
and then expect:
- a flood of cheap imports into the OECD nations
- followed by ever increasing national protectionist trade policies (Asia will export deflation; and that will work until the protectionist trade barriers go up),
- stock market to collapse, (aggregate stock valuations and derivative values will decline and that’s deflationary,
- public debt ratings to decline as confidence in the financial viability of the public sector erodes with the continuing printing of money by national central banks,
- Federal and state agencies to pay higher rates of interest in order to offset the perceived risk of buying public debt as it will become increasingly difficult and more expensive to sell new bonds, or to roll over maturing issues of existing public debt,
- bonds not held to maturity to decline in value as public sector bond interest rates go up, bonds not held to maturity will decline in value.
- bond devaluations and declining property rents to jeopardize the asset base that supports existing pension plan and insurance annuity contract payments causing aggregate plan values decrease.
The International Monetary Fund (IMF) has recently forecast World GDP to increase by 3.8% in 2015. GDP is expected to increase by:
- 7.1% in China,
- 3.1% in the U.S.,
- 2.7% in the U.K.,
- 1.3% in the Euro area, and
- .8% in Japan
but this scenario appears to be optimistic. In order to sustain a stable economy through 2015, we have to assume:
- WTI oil prices below $105 for most of 2015,
- no disruption of oil supplies,
- no substantial increase in taxes,
- medical costs are brought under control,
- restrictions will be placed on Federal and State EPA regulatory authority,
- Federal and State regulations will favor private business activity,
- Central Banks will refrain from printing money,
- Central Bank policy will compel the banking system to support private business activity,
- governments will not increase national debts,
- nations will not engage in deliberate currency devaluations,
- the Stock Market will not collapse,
- Vladimir Putin will not try to annex more nations, and
- last – but not least – relative calm will prevail in the Middle East, Africa, and elsewhere,
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BUT, since liberal economic and social philosophy dominates OECD national political agendas, we can expect liberal financial solutions will be imposed to solve OECD financial problems and this ideology is:
- unlikely to support the creation of national wealth,
- very likely to increase government spending, and
- absolutely certain to increase the transfer of income and savings from “rich” to “poor”.
Although it decreases national wealth, growth in public employment is seen as beneficial. Fiscal discipline is (deliberately) ignored. National central banks print copious amounts of money. The resulting currency devaluation:
- is likely to increase the cost of living
- will possibly have the net effect of driving OECD nations into a long period of high inflation accompanied by declining business activity,
- will cause high rates of unemployment and underemployment,
- and the resultant poverty will drive widespread social unrest
– but I could be wrong.
- Perhaps the collapse of the financial system will usher in a period of deflation like the 1930s.
- Perhaps currency devaluations will result in high rates of inflation
- and maybe the IMF is right.
Do your own homework and then judge for yourself.
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