What happens if the G20 nations really slash debt?
Here鈥檚 a thought. The G20 meeting ended with a call to reduce deficits. The Obama team, on the other hand, warned that cutting deficits might undermine a very fragile recovery.
There seems to be no understanding of what is really going on. We are in a spell of debt de-leveraging in the private sector. There is no way to make the problem disappear. The only real question is who will bear the losses. We鈥檝e seen what happened in Japan. That鈥檚 the alternative that most economists are urging (only they claim that this time the stimulus will work鈥f we keep at it).
But what if governments really take the path signaled by the G20? What if they cut spending? What then?
Well, then you鈥檇 have de-leveraging in the private sector. And de-leveraging in the public sector. At the same time. There would probably be hell to pay for a while. But it would at least cure the real problem rather than just disguising the losses and collectivizing the costs.
But don鈥檛 worry, dear reader. There is almost no chance that governments will follow through on their promises to de-leverage. Instead, they will reduce the rate at which they are adding debt. The private sector will continue to de-leverage. Government 鈥榓usterity鈥� measures will be blamed.
And then? Well鈥ho knows? But that鈥檚 probably when the printing presses get turned on鈥nd gold enters the third and final stage of its bull market.
Stay tuned.
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