Tag Archives: hyperinflation

Waking Up To Sovereign Debt

25 Mar

From Business Spectator:

The current Greek debt crisis is likely to be only the first of a series of disruptions this year, as global financial markets inevitably shift their attention to the sovereign debt problems of advanced economies.

These problems were magnified by the global financial crisis. Faced with a collapse in consumer spending, and the risk of widespread bank failures, governments opened their cheque books while central banks printed trillions of dollars.

This had the effect of stabilising the financial system, but we now have to deal with consequences of these actions, and particularly with the deterioration in the balance sheets of most advanced economies.

The sovereign debt problem is not confined to the so-called PIIGS of Europe (Portugal, Ireland, Italy, Greece and Spain). Markets are also unnerved by the massive build-up of government debt in the United Kingdom and Japan. And that’s without mentioning the huge budgetary problems facing debt-laden US states, such as California.

There are various doomsday scenarios as to how this situation will ultimately play out.

The first is that countries will start off by heading in the direction that Greece is currently taking. That is, governments will attempt to repair their balance sheets by slashing their spending, and pushing up tax rates.

But the worry is that such budgetary measures will prove counter-productive. The countries that follow this path will end up with their economies plunging into recession, and with an outbreak of social unrest. And as their economies shrink, their tax revenues will dry up, which means that they won’t be able to pay the interest bills on their massive debt.

Eventually the situation will become untenable, and central banks will be forced to respond to the situation by printing more and more money in order to create enough inflation to erode the value of the debt.

Under this scenario, massive central bank money printing means ending up with hyperinflation, along the lines of the Weimar Republic, or, more recently, Zimbabwe. In which case the price of gold explodes, with some predicting it could reach $5,000 an ounce. Prices for other commodities also soar, and stock prices are also likely to remain high, as it is assumed that central banks will always keep interest rates below the rate of inflation.

The alternative fear is that the world ends up looking a lot more like Japan than Zimbabwe, and the main struggle is against deflation.

Under this scenario, the determination of consumers to reduce their debt levels overwhelms government efforts to stimulate the economy. What’s more, the deleveraging process causes demand to collapse, and this puts pressure on labour costs. Households respond to this further deterioration in their earnings by tightening their belts even further, resulting in an ongoing deflationary cycle.

One of the main arguments of this camp is that even though central banks continue to print huge amounts of money, it won’t lead to inflation because the banks are not lending the money. Instead, total credit in the economy will contract as consumers, and businesses, try to repay their existing debts, rather than taking out new loans.

According to this view, the price of gold and other commodities will collapse. The drop in demand will also put pressure on the profit margins of businesses, and this will push global sharemarkets lower, even though interest rates will be kept close to zero.

Of course, it’s likely that neither of these two extreme views will play out in their entirety. But we are likely to see markets oscillate between these two opposing fears as worries about sovereign debt continue to climb this year.

Got to love that blind optimism in the final paragraph.

It’s interesting to observe how the power of denial encourages an otherwise rational and sensible commentator to set aside all the evidence of where things are clearly headed, simply because the end of this road looks calamitous –

"She'll Be Right, Mate"

Everything Falls On Debt Concerns

25 Mar

From Bloomberg:

March 24 – Treasuries, the euro, stocks and commodities slid as a downgrade of Portugal’s debt and weaker- than-forecast demand in a U.S. bond auction added to concern governments will struggle to fund swelling deficits.

Greece “is going to default at some point,” and Europe’s failure to answer that challenge will hurt the common currency, UBS Investment Bank’s London-based deputy head of global economics, Paul Donovan, said in an interview on Bloomberg Radio. “If Europe can’t solve a small problem like this, how on earth is it going to solve the larger problem, which is the euro doesn’t work,” he said.

Taleb Concerned About Hyperinflation

23 Mar

From Bloomberg:

Rising public debt could lead governments to seek to eliminate it through inflation or even default if they fail to carry out fiscal measures in time, Mohamed A. El-Erian, co-chief investment officer at Pacific Investment Management Co. warned earlier this month. Nassim Nicholas Taleb, author of “The Black Swan,” a book arguing that unforeseen events can roil markets, said March 12 he is concerned about hyperinflation as governments around the world take on more debt and print money.

Abbott: Low-Growth, High Inflation Future

1 Mar

Tony Abbott also sees the danger signs that so many are warning of:

The danger for Australia, as we enter what could turn out to be a long period of 70s-style low growth and high inflation, is not just that the Rudd government has saddled us with debt and deficits but that it’s undoing the reforms on which a golden age was built.

Rudd Labor have tried to smear Tony Abbott’s economic credentials too, trumpeting that he thinks “economics is boring”. Whether that is true or not is beside the point – just because a subject is boring, does not mean you do not understand it.

Tony Abbott is a Rhodes Scholar, with a degree in Economics.  The Rudd Labor economic team, by comparison, are all uneducated imbeciles. Compare their credentials here.

Barnaby is right. Tony Abbott is right as well.

Thank goodness that at least two people in our parliament are aware of the serious economic problem that lies ahead.

No, We Cannot Pay Our Debt

26 Feb

Here’s another picture that tells a thousand words.

Yesterday Barnaby wrote in The Australian about the annual Budget surpluses needed to pay back Labor’s ever rising debt ($1 Billion more today alone; another $1.8 Billion next week):

Let’s talk about the abundance of faith exhibited by Labor when it tells us of the eight consecutive $19bn surpluses that are required to bring the budget back into orbit when the continued stresses on the international economy are clear and evident, especially in Europe.

On the ABC’s Q&A program on Feb 15th, Barnaby pointed out that Labor’s “plan” to return the Budget to surplus is pure fantasy:

We have always got the view that you should try and reduce tax but the first thing, without harping on it, we’ve got to deal with the debt and because they keep racking up debt, that takes away our capacity to reduce your tax and there’s no other way around it. You either increase your revenues, decrease your costs – they talk about productivity and sort of the cyclical angel descending from heaven and making everything better

Well, just what is the likelihood of that cyclical angel descending?  And even if it does, can it produce eight consecutive surpluses of $19 Billion?

Decide for yourself.

Below is a chart of Australian Government Budget surplus / deficits, dating back to the beginning of the Howard Government. Source is the Reserve Bank of Australia’s Statistics section. Click on the chart to enlarge –

This country has never seen anything like eight consecutive years of $19 Billion surpluses. In fact, the Howard Government achieved it just 3 times… in 12 years… during an unprecedented mining boom.

Barnaby is right.

Roubini: ‘Risky Rich’ Countries in Greatest Danger of Default

26 Feb

New York University Professor Nouriel Roubini – famous for having predicted the GFC in 2006 – again defies the so-called ‘conventional wisdom’ by warning that it is the “risky rich” countries who are in greatest danger of sovereign debt default:

Today’s swollen fiscal deficits and public debt are fueling concerns about sovereign risk in many advanced economies. Traditionally, sovereign risk has been concentrated in emerging-market economies. After all, in the last decade or so, Russia, Argentina, and Ecuador defaulted on their public debts, while Pakistan, Ukraine, and Uruguay coercively restructured their public debt under the threat of default.

But, in large part – and with a few exceptions in Central and Eastern Europe – emerging-market economies improved their fiscal performance by reducing overall deficits, running large primary surpluses, lowering their stock of public debt-to-GDP ratios, and reducing the currency and maturity mismatches in their public debt. As a result, sovereign risk today is a greater problem in advanced economies than in most emerging-market economies.

Is Greek Debt Contagious?

26 Feb

The Greek flu looks like it’s spreading through Europe. How contagious is it? How far will it spread?

Charles Wyplosz, Professor of International Economics at the Graduate Institute (Geneva), and one of the world’s leading experts on Eurozone monetary and financial matters, sets the record straight on the latest twist in the GFC:

A debt default by the Greek government, on its own, would be a non-event. Greece is a relatively small country (with 11 million people, its GDP amounts to less than 3% of Eurozone’s GDP). Contagion to Portugal, which is even smaller, would also be a non-event. Moving on to Spain and Italy is another matter…

The real worry is the banking system. Some European banks hold part of the Greek debt and, if still saddled with unrecognised losses from the subprime crisis, some might become bankrupt. Many governments have simply not pushed their banks to straighten up their accounts, and they are now discovering some of the unforeseen consequences of supervisory forbearance…

Contagious debt defaults, along with bank failures, could lead to a double-dip recession in Europe, possibly affecting the US as well. If that were to happen, with the interest rate at the zero lower bound and fiscal policy not available any more, we could face a terribly bad situation.

Hummel: The US Will Default On Its Debt

26 Feb

Barnaby warned about the possibility of US sovereign debt default. San Jose State University economist, Professor Jeffrey Rogers Hummel, makes a prediction:

It is not literally impossible that the Federal Reserve could unleash the Zimbabwe option and repudiate the national debt indirectly through hyperinflation, rather than have the Treasury repudiate it directly. But my guess is that, faced with the alternatives of seeing both the dollar and the debt become worthless or defaulting on the debt while saving the dollar, the U.S. government will choose the latter.

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