Deleveraging?

Paul Krugman says that America — with its lukewarm stimulus — is doing better at deleveraging than more austerity-prone nations.

That is broadly correct. Austerity post-bubble is a cure for nothing. But America is still doing very badly. In the deleveraging horse race, America is “doing better” than horses that ditched their riders into the mud.

From the Economist:

And — given that I know that the UK’s total-debt-to-GDP is more like 1000% — these figures might understate the problem.

Of course, progress in deleveraging is a slow process, as the example of the British Empire teaches.

But I fear that every single case presented is probably closer to Japan in the 1990s than Britain in the 1950s. Central banks and governments the world over have concentrated on sustaining broken systems and zombie banks, thereby sustaining the bubble-level prices, a process that Nassim Taleb described in the Bed of Procrustes as “amputating limbs to fit clothes”.

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10 thoughts on “Deleveraging?

    • First, as you can see, there’s not much deleveraging “ongoing”.

      Second, the Fed’s policies are hardly encouraging deleveraging. The ZIRP doesn’t encourage saving or debt extinguishment. It encourages credit creation, precisely the opposite.

      Third, the continuation of the status quo is dependent on the dollar remaining as the global reserve currency, and the medium of exchange for energy. This seems to be ending.

      Fourth, markets will eventually sniff out that Treasuries are very overpriced. China and Russia have been offloading them for months. The Fed was very lucky that it could monetise a lot of debt (to take debt off the market, constrict supply, and thus raise price levels) by pushing money to the PDs, who have held it as excess reserves rather than pushing it into the market and causing huge inflation. I’m not sure how long that can go on for, especially with the dollar’s reserve status threatened.

        • This is a bear market?

          I think there is certainly some slowdown from lower consumer demand. I think “bear market” is a stretch. However with global geostrategic tensions, e.g. American concentration in Pacific, I fully expect oil prices to maintain current levels, and probably trend higher in the medium term.

    • What I see is a slowdown stemming from lowered global consumer demand. That’s going to keep prices contained. But it’s not going to drive prices back down to where they were in 2008 unless China has a very, very hard landing, which I think is extremely unlikely. They have enough dollars there now to recycle them for domestic consumption.

      And with global military tensions rising, I fully expect some upward pressure in the medium term.

  1. I thought Iraq, under the Sadam regime wanted to use the Euro, and this is why the USA really wanted to go after him.

    The same with Qadaffi and Gold for Oil.

    What is the US reaction to all these countries bypassing USD’s?

    • Well, we’ll soon see.

      I think the United States — particularly the Obama administration — are resigned to the fact America will no longer be the global hegemon. However, I think judging by the rhetoric they expect a gradual and moderate change to a multi-lateral world.

      From USA Today:

      WASHINGTON – Top Pentagon officials stressed Thursday that even the shrinking military they envision under President Obama’s new strategy will be strong enough to take on all comers, a view not shared by some leaders on Capitol Hill.

      For decades, fighting and winning two wars at once has been an underlying tenet for Pentagon planners. The strategy announced Thursday foresees a smaller Army and Marine Corps, far less appetite for wars like those in Iraq and Afghanistan, greater emphasis on special operations forces and intelligence-gathering, and shifting focus to China and the Pacific.

      The new strategy was necessitated by the need to cut military spending by at least $480 billion over the next decade and the winding down of the Iraq and Afghanistan wars.

      Romney or Gingrich will by default, I think, violently resist such a change, as exemplified by Romney’s recent rhetoric.

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