Frypan to Fire

An IMF sponsored period of 15 per cent unemployment and 15 per cent inflation would allow Europe to survive intact and make the adjustments necessary to combine the spendthrift economies with the thrifty in a way that genuinely works. It would be a protracted but endurable adjustment period but it would not be a catastrophe.

Please click on the link above to a excellent article in today's Business Spectator from Mark Carnegie. I would content that Mark's best choice "Plan C" will end up being more of a global choice than one confined merely to Europe. Unsustainable global indebtedness is only now finally being brought to account. The flight to quality to the US dollar that we have recently seen is truly a frypan to fire scenario.

Global interest rates will soon rise and this will be a phenomenon largely outside the control of individiual reserve banks.

Five years of 15% inflation would indeed be the best outcome for debtor nations by facilitating a structural default on their debts. The concept of sovereign risk has even begun to be comprehended by global markets.

Three Gets You Two

The link above takes you to a great article from Pimco's Bill Gross. In its core this article takes us to the reason why we are not at the end of the Great Recession. The global deleveraging has not yet begun. Rather than retire and reduce their debt burdens governments around the world have started the morning after the GFC hangover with a couple of Bloody Mary(s).

How governments approach deleveraging remains to be seen. In the context of the current level of global indebtedness in many economies such as Greece, austerity measures and rebalancing budget may simply not even be practical let alone politically viable. That leaves the propects of default of which I believe there are at least three distinct kinds (possibly more):

1. Repudiation - "I can't repay and even if I could I'm not going to try"
2. Negotiation - "I can't repay but I would like to if I could. How about you take 50 cents in the dollar and we call it quits"
3. Stealflation - "Actually I will pay you all the money I owe no problems.... I am however going to run inflation at 15% for 5 years and the $1.00 I owed you is now $0.12 real"

My money is still on the smart debtor governments running inflation at 15% for five years, or something similar.

I suspect over the next 5 years we will see all three solutions.