Debt deflation

Nice presentation on the unfolding of debt deflation from David Meier that, however, does not cut to the core problem that causes debt deflation and that makes the reflationist “solution” risible:  we have too much debt.   It’s the debt, stupid!  Prudent lenders have always helped their borrowers by examining the cash flows of applicants and making sure that the credit extended isn’t going to put the borrower underwater.  On the other hand, if you’re writing trash loans that you’re going to unload into a big Wall Street securitization that is going to get a triple-A credit rating from a rating agency paid by the investment bank floating the Structured Investment Vehicle (and possible taking a short position in it at the same time…), then… well let’s just say that isn’t banking, that’s fraud, and everyone loses except the Wall Street sharpies who invented the shell game and sold it to those bankers greedy enough to go for it (with full knowledge of what they were doing, IMHO—committing fraud to get obscenely rich quick).  The borrower who also falls for the ruse then loses his or her house.

What is the solution to debt deflation?  Restore honesty and transparency to the financial statements.  Write off bad debts, get society back a level of indebtedness that it can handle.  Provide a livable dole, health insurance and education to the people.  Stop imperial overextension, stupid wars, excessive and corrupt government spending.  Get real, in other words, about our fiscal position.  America was the world’s greatest creditor in 1933; today America is the world’s greatest debtor.  Reflation won’t work because any increase in interest rates given our debt load will cause interest payments to balloon to unmanageable levels faster than incomes can catch up.

Note that those who keep their jobs and houses don’t much get hurt in a debt deflation (see the comment from a friend of Jesse’s in Japan regarding their “lost decade”; turns out it wasn’t bad at all).  The lucky employed can refinance at lower rates, and get more for their money at the market.  Those who become collaterally unemployed through no fault of their own require social support, if our society believes we share a responsibility to care for one another.  Seems to be an open question among those on the right; while the question I have about those on the left is whether they, like the Wall Street grifters, will pile too much debt on the American people. 

Debt Deflation October 2009