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October 10, 2008


Justin Rietz

There is nothing the governments of the world can do. Western world consumers and governments, specifically in the U.S., have spent way beyond their means. No matter how great a bailout plan appears to be, the reality is that it is impossible to spend your way out of debt - as the U.S. is currently trying to do.

The U.S. Fed is now printing money as fast as it can, and will continue to do so (Bernanke, an "expert" on the Great Depression, has clearly stated that he thinks the solution would have been to print money like mad). After the current deleveraging is finished, we are going to face incredibly high inflation as the money supply soars.

This is exactly why business cycles occur - the Fed pumps money into the system to pull the economy out of a slump, creates another bubble(tech bubble, housing bubble) that then leads to a deleveraging period / recession. Each time, the recession gets worse, and this time we are in for the "mother of all recessions."


«the reality is that it is impossible to spend your way out of debt» Well, governments sort of can, but the big, big deal, is who pays the ultimate price. If USA housing stock prices went from 9 to 18 trillions in price, and have to go back to 9 trillions, the 9 trillion difference will not reappear magically -- a lot of it has been pocketed and spent. Those who took out HELOCs on their higher price houses won't give back the money, or not without pain. What is happening around the world is that there is a deep fight as to whom ultimately pays the cost.


Blissex: All debts are (in principle) negotiable. Balanced ledgers and redemption of most "obligations" (in full) are "just" social conventions, albeit strong ones that should not be lightly violated. But as many examples have shown where e.g. workers have been stiffed of retirement benefits or employment "guarantees" in exchange for concessions, contracts can be reneged on without the world coming to a halt.

It is, again in principle, possible to spend one's way out of anything, if the "new money" is invested in productive assets (hard as well as human) that then generate surplus returns. After all, money is "just" a means of exchange.

But that requires meritorious fiscal, social, economic, and technological policies at a level that has been rarely demonstrated in the past.


So, the governments have now acted. Is it sufficient, or are we really toast?

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