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Well, in reality, the problem is private debt, not the government debt. And that’s because unlike government debt, private debts have to be repaid. And there are only two ways of resolving a private debt problem for an economy as a whole. Either you do the American way, which is foreclosure and essentially foreclose on the real estate, or you write down the debts to the ability that can be paid.
Now, in the past, when you had a financial crisis, the banks would have to liquify the loans. They take the loss on the loans. The debts would be written down to whatever the market could afford. That was the old market solution to the debt problem. But now the government is saying, we cannot have a market solution to the debt problem because our constituency, our largest campaign contributors, the banks, would lose, so we have to keep the debts in place, and in fact we have to have even more debt to reinflate the real estate market so that the banks won’t lose any money on the fact that they’ve lent much too much money that cannot be repaid.
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HUDSON: There is indeed one entity that has been producing too much money, way too much money, irresponsibly, and that’s the banking system that led to the credit crisis. It was–the money that has been inflating prices has been the commercial banks inflating real estate prices, inflating education prices, inflating prices for stocks and bonds that have just had a huge bubble. So the inflationary money creation is by the commercial banks, not by the government. And nobody’s talking about that. Of course they’ve reached the limit. But it’s the banks that are creating money.
And somehow people have believed that inflation is very good if what’s going up is the price of your home. But then when the price goes down, what’s really gone up has been your debt, and what people thought was an asset boom in net worth and wealth creation (as Alan Greenspan said), it turns out to be debt creation. And all–they’re left with a massive debt. And it’s the private debt that is the residue of the bubble economy that is now the big problem in overlaying the economy. And instead of trying to resolve that problem by writing down the debts to the ability to pay, by writing down housing debts to the real value of the house, so the current mortgage, or writing it down to the one-quarter of your income that used to be normal and is normal in other countries–by refusing to roll back the public debt and write it down, the government is pushing austerity here, just exactly as the pound is doing in Europe, as the Eurozone is doing.
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http://michael-hudson.com/2013/03/bank-bailouts-burden-the-public-debt/
Prolonged Credit Bubbles inflate myriad price levels and fuel atypical (and Bubble-dependent) spending, investing and financial flow patterns. Importantly, the resulting financial and economic Bubbles are sustained only through ongoing Credit inflation and associated asset price inflation. A Credit slowdown exerts downward pressure on inflated price and activity levels. Invariably, declining asset prices become problematic, especially late in the inflationary cycle, as falling price levels incite de-leveraging and risk aversion. Mature Bubbles require ongoing leveraging and risk-embracement – or else. And it is today almost unbelievable that asset Bubble risks are so easily disregarded.
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May 1 – Bloomberg (Sarah Mulholland): “Automakers are giving subprime buyers the most long-term loans in at least eight years, sparking concern losses will curtail returns in the $149 billion U.S. market for packaging the debt into bonds. The average maturity for car loans to borrowers with blemished credit contained in asset-backed securities surpassed 70 months last year for the first time since at least 2005, according to Moody’s… All loans longer than 72 months more than doubled to 14% as of April 20 from 6% in 2010… Lenders are loosening loan terms, giving buyers more time to pay off debt and enabling U.S. households to purchase cars at the fastest pace in more than five years. Asset-backed sales linked to auto debt are surging…”
http://www.prudentbear.com/2013/05/too-much-asset-inflation.html#.UYeF3crV-JQ
Debt driven consumption became the tool of generating economic growth. But this process requires ever increasing levels of debt. By 2008, $4 to $5 of debt was required to create $1 of growth. China now needs $6 to $8 of credit to generate $1 of growth, an increase from around $1 to $2 of credit for every $1 of growth a decade ago.
Debt also became a mechanism for hiding disparities in the distribution of wealth in many societies. The democratisation of credit allowed lower income groups to borrow and spend, encouraging housing booms, in order to deal with the problem of stagnant real incomes.
The ability to maintain high rates of economic growth through additional debt is now questionable. The world is being forced to “delever” – reduce debt.
Following the onset of the global financial crisis (“GFC”), individuals and companies began the long slow process of reducing debt. The resulting shortfall in demand was filled by governments who borrowed heavily to prevent the “Great Recession” turning into the D word - Depression. It was heroic bet on growth and inflation. In the words of writer François Duc de La Rochefoucauld: “Hope, deceitful as it is, serves at least to lead us to the end of our lives by an agreeable route.”
http://www.economonitor.com/blog/2013/04/the-end-of-growth/
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