Without a real bust, the debt will linger on...
ECONOMISTS were largely responsible for the huge credit bubble that took debt to GDP in the US from 112% in 1972 to 296% in 2008, usually in their roles as policymakers, writes Bill Bonner in the Daily Reckoning.
They told the feds that they needed a "flexible" currency. What they got, of course, was one that was flexible in one way only — it stretched out...but never came back. Credit expanded 50 times in the last 50 years.
Then, when the debt bubble blew up in 2008-09, economists stepped in again...this time to prevent the private sector from setting things right. Instead of letting a crash and quick depression wipe out the excess debt quickly, the feds engineered a "contained depression" which can go on for decades.
What contains the depression? More credit!
Deficits...bailouts...subsidies...and the lowest interest rates ever. You can look throughout the developed world; the highest interest rate offered by central banks for short-term money is only 0.75%.
And now economists are warning that the US tax economy could fall off a 'fiscal cliff' at the end of the year. Tax rates will go up. Automatic spending cuts will come down hard. This will allow the depression to break out of its cage...or so they worry.
"Stop, before it is too late," they say.
Over at the Pentagon, for example, contractors are forced to worry that their next boondoggle might be cut off. Military cuts threaten Barack Obama's program of "Strategic Guidance," says an article in today's Financial Times. In addition, one million jobs could be lost! The US would fall into real depression!
Since the crisis began, private sector debt has gone down...but only to 250% of GDP. That's still more than 2 times what it was when the US still had honest money. Much of that debt must be "bad" — in the sense that it couldn't withstand a financial crisis...or wouldn't still be on the books were it not for the feds' clumsy meddling. That's why nature, in her wisdom, provides us with natural debt-cleansing episodes...also known as depressions.
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