20 Jul 2012

Red Pill, Blue Pill

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James Delingpole, at the Telegraph, is offering readers an economics red pill.

The red pill – for those who haven’t seen The Matrix – is the one which shows you the world as it really is rather than cosy, fantasy confection of the popular imagination. The red pill is not for the fainthearted because it involves confronting painful, ugly reality rather than living the dream.

Let me give you an example of what taking the red pill entails. It’s a report from last year by the Boston Consulting Group showing that the amount of household, corporate and government debt which needs to be eliminated stands at $21 trillion. The cost of dealing with this “debt overhang” will entail the loss (ie confiscation by the government) of one third of the wealth of the asset-owning classes. Some time in the next few months, weeks or years, we’re all going to be taking a 30 per cent hair cut.

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A couple of years ago economists Ken Rogoff and Carmen Reinhart wrote a book about “financial follies” of the last eight centuries. It was entitled “This Time It’s Different”, which is the refrain sung each time by those who claim that excessive debt accumulation will not deliver the ruinous consequences it has in the past. Except that it almost always does.
There is no gentle way out of the global debt mess we have created. The one avenue of hope — a return to rapid growth — is inhibited by not only the public debt levels but also by the severe anti-growth policies of the current US administration (not to mention those in Europe). The most common historical exit strategy of countries in this situation has been debasement of the currency, rather than outright default. It’s impossible to say with any certainty how this folly will unfold, but it’s not going to be pretty.


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