Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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