ITV’s Programme On Britain’s Huge Debts
Guido’s writing about the debts again, and rightly so. But as usual the site owner and his followers assume that high debts will automatically lead on to inflation. But there are many examples where this has not been not the case. Debt being taken out to chase rising prices is inflationary. But once debts are at their peak, and people want to get hold of cash to pay them off, cash becomes not less valuable, but more valuable. It’s a concept that many seem unable to grasp. Yet look at Japan over the last fifteen years. Debts have ballooned but prices have continued falling.
This is the comment I left on www.order-order.com –
Debt is not necessarily inflationary. If everyone is competing to pay off debt, demand for cash rises and its value rises while the price of assets all being sold at once falls. If money is printed to cover the debts, that would be inflationary.
But the collapse in the money supply in the real economy could be so vast that the net effect, even with trillions of QE, could still be net deflationary. In the US, inflation underlying is only 1%, despite $2.6 trillion QE, a fallen currency, record low interest rates, oil and commodities at 2 year highs.
Don’t always assume that vast debts equal inflation to follow. Prices of things not directly affected by QE are falling – such as property prices. The effects of QE might well be transitory, and bigger and bigger splurges would be needed. Yet politically this will become increasingly impossible, let alone that the Fed would not want to deteriorate its own loan book by taking in junk IOU’s.
My preference would be for the government to borrow not to subsidise its deficit, which needs eliminating, but to build infrastructure, which will increase the country’s longterm competitiveness. That kind of investment would look good in an investor’s portfolio, compared to IOUs from governments sinking further and further into debt.
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