Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold & the USDX: Correlations - 2nd Dec 20
How An Ancient Medicine Is Taking On The $16 Trillion Pharmaceutical Industry - 2nd Dec 20
Amazon Black Friday vs Prime Day vs Cyber Monday, Which are Real or Fake Sales - 1st Dec 20
The No.1 Biotech Stock for 2021 - 1st Dec 20
Stocks Bears Last Chance Before Market Rally To SPX 4200 In 2021 - 1st Dec 20
Globalists Poised for a “Great Reset” – Any Role for Gold? - 1st Dec 20
How to Get FREE REAL Christmas Tree 2020! Easy DIY Money Saving - 1st Dec 20
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
BLOCKCHAIN INVESTMENT PRIMER - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Government Debt Defaults and Inflation Are the Norm, Not the Exception

Interest-Rates / Global Debt Crisis Sep 01, 2010 - 12:20 PM GMT

By: Claus_Vogt

Interest-Rates

Best Financial Markets Analysis ArticleThe past 15 years have certainly been exciting for investors. During the second half of the 1990s we experienced one of the largest stock market bubbles of all times … and its bursting. Then, only a few years later, one of the biggest real estate bubbles … and its bursting.

In the aftermath of these events the world stumbled into the most severe economic downturn since the Great Depression of the 1930s. And the banking system came to the brink of a total collapse.


Unprecedented government interventions in the U.S., the UK, and continental Europe were implemented to prevent the breakdown of the financial system. Naturally these interventions came with a price: Ballooning budget deficits.

Now we’re witnessing a veritable debt explosion in the developed world …

Never before, aside from times of major war efforts, have governments amassed as much debt as during the past years. And this debt binge comes atop a decades-long trend of ever higher indebtedness.

Then, seemingly out of the blue, interest rates for Greek government bonds started to rise drastically. Suddenly the Greek state was at the brink of default, and other European countries like Spain, Ireland, Portugal, and Italy were also in jeopardy.

Stronger European countries and the International Monetary Fund (IMF) stepped in with a $1 trillion rescue package to prevent this crisis from running its natural course — that is massive government defaults.

Historically, Greece’s De Facto Bankruptcy Is All too Common

When examining the current predicament, you could easily conclude that we’re living in extraordinary times. But looking through a historical lens immediately shows that what seems to be extraordinary is in effect somewhat normal …

Sovereign debt defaults and sovereign debt crises are nothing new at all, but as old as the government bond market. Financial history is fraught with examples of government bond investors losing big time.

In their book, This Time Is Different, Carmen M. Reinhart and Kenneth S. Rogoff give dozens and dozens of examples from 1802 Austria-Hungary until 2002 Indonesia, including countries like France, Germany, Argentina, Russia, Turkey, Sweden, Mexico, China, India, and Japan.

Government bond defaults are nothing new.
Government bond defaults are nothing new.

Now our leaders have set us up for the same fall by accumulating a debt problem so large …

There Is No Easy Way Out!

In theory there are six ways out of government debt:

Option #1— Stimulate economic growth

A growth miracle is highly unlikely here. If anything, history tells us to expect subdued growth in the aftermath of a burst housing bubble.

Option #2— Cut interest rates

Declining interest rates are already behind us. The Fed is done, interest rates are just about as low as they get.

Option #3— Bailouts by other governments

Bailouts by other governments are not an option for major economies, and totally impossible for the world’s largest economy and the world’s largest debtor, the U.S.

Since the above three options, let’s call them the easy ones, are not available for the U.S., government officials are left with the remaining three. All of them come with lots of pain …

Option #4— Implement austerity policies

Higher taxes and reduced government benefits can be a tough pill to swallow.
Higher taxes and reduced government benefits can be a tough pill to swallow.

Austerity policies mean tax hikes and spending cuts. Greece can be seen as a test of this agenda. And its citizens have responded with strikes and social unrest.

Option #5— Crank up the printing presses

Although time lags are long, money printing is probably the most alluring path for politicians. And there’s always the hope to get away with offering scapegoats, because the mechanics of inflation are difficult to understand.

The Bernanke Fed has often made clear that it strongly prefers an inflationary policy to cope with the effects of the burst bubble and the Great Recession.

That is, however, a very risky undertaking …

In fact, history shows inflation can easily get out of hand and destroy the very fabric of a society. The most prominent example was Germany in 1923 when one U.S. dollar was worth 4 trillion German marks.

And the most recent case was Zimbabwe a few years ago when at one point inflation was estimated at 6.5 quindecillion novemdecillion percent (65 followed by 107 zeros). The country has even issued the world’s first 100-trillion dollar note.

Option #6— Default

Outright default is what happens if our leaders keep doing what they’ve been doing for the past several years. And for now, they seem determined to continue the very policies that got us into the current mess in the first place.

There are many names or euphemisms for default: Restructuring, rescheduling, repudiation, or moratorium to name just a few. But they all mean the same sad thing: Breaching the terms of debt contracts, such as bonds.

Which One Will They Choose?

So what will it be? Which way will our leaders choose to dig us out of this mountain of debt?

I think we’ll see all three in the coming years: Austerity policies, money printing, and default. It may very well differ from country to country, and it may even come as a succession.

For instance, like was done in Greece, they might first try some tax hikes and spending cuts …

But as soon as the public outcry becomes too loud to bear, politicians will quickly retreat and start money printing instead. Then the bond market could rebel forcing a return to austerity, and so on. Until, in the end, either hyperinflation or outright default terminates the whole cycle.

What Can You Do to Protect Your Wealth?

Unfortunately there is no easy answer. In my mind, though, one thing is certain: You must be as flexible as never before to act early on initial signs of important policy shifts.

Right now, my cyclical model is giving clear signals of a coming recession or another down leg in a running depression. The right thing to consider doing in this phase of the cycle is avoiding risk, especially stocks and junk bonds.

Best wishes,

Claus

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules