Merkel mauls central banks

Finally some common sense from main stream politicians.

Though for the wrong reasons, Merkel finds the stones to tell the world that central bank monetization is not the solution. Of course, Merkel here is afraid of a hyperinflationary bout if/when the economy should pick up. Merkel of course is German and memories of Weimar are still vivid in her knowledge of history.

Of course you all know what my position is. In a situation where we have to sustain a mountain of obligations estimated by the BIS at US$500Trillion with a global GDP of some US$40Trillion, I’d say that the best we can hope for is hyperinflation.

Here is the truth. The GDP of the USA is around 40% of world GDP. US GDP is (or was) 70% consumer expenditure.

Now, keep those figures in mind.

The truth is that in 30 years of aggressive credit and monetary expansion in the high double digits, GDP in Western countries has put in growth of 6% annually in a good year but more often 3%. The truth is that after a steady decline over the past thirty years, today the velocity of money has finally fallen below 1. . The truth is that despite having dropped interest rates to the lowest level in living memory, the Western authorities have not been able to revive credit creation thus they have not been able to revive consumption….

… without consumption, US GDP is pretty much dead…. and by extension, world GDP is not going to be too healthy either…

HOWEVER

… all outstanding debts remain…

Debt must inherently and by necessity be paid off or written off. Not recognizing debt (i.e. bypassing that pesky accounting rule called mark to market) can momentarily help a bank or a government give the appearance of being financially sound… momentarily… but debt will inevitably and most certainly be paid off or written off by either the debtor or the creditor. There is not alternative to that dynamic. None.

So, if debt will be extinguished one way or the other, if we assume that only 10% of global obligations will be extinguished, that is good to wipe out global GDP for one year and then some.

If that doesn’t seem too bad, think about what a year of zero contributions to all social programs will do to a country like the UK, Spain, Ireland …. or the USA…

Merkel is right. Monetizing debt only makes things worse but at the end of the inflationary cycle, monetizing debt has far scarier consequences than inducing a bout of hyperinflation which, at this stage, is actually what would save us.

http://www.ft.com/cms/s/0/846fd756-4f90-11de-a692-00144feabdc0.html?ncli…&nclick_check=1

Incidentally, you’ll be well served by observing what is happening in California. The state of California by itself is an economy on par with most Western countries like France or Germany. California is a microcosm of what is happening globally. The debt implosion dynamic will play out in California much more quickly than globally and will provide an accurate road map of the consequences of the end of the inflationary cycle and the implosion of credit markets.

http://news.yahoo.com/s/afp/20090602/ts_alt_afp/useconomycaliforniabudget_20090602234541

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One Response to “Merkel mauls central banks”

  1. [California is] less than 50 days away from a meltdown of State government « Guido’s temple of the absurd Says:

    […] is] less than 50 days away from a meltdown of State government By guidoamm As stated here (bottom of essay), California will be the preview to what is about to happen […]

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