Friday, 4 September 2015

Debt deflation.

Carmen Reinhart claims that when prices fall at 1 or 2% a year, that means debts rise in real value at the same rate, which in turn is a significant problem for debtors. I suggest, on the contrary, that that’s a complete non-problem, particularly given that interest rates are now at record lows.

Is a rise or fall in the stock market of 1 or 2% a year any sort of big deal for investor / savers? Nope. It’s a complete irrelevance. Even the recent 10% fall and subsequent recovery of the stock market all within a week was a complete irrelevance for those intending to hold their investments for several years.

Reinhart also suggests that the above 1 to 2% fall in prices is a big problem for Greece. Well in the total scheme of things, that 1 or 2% is a complete irrelevance. For example when the Troika took over Greece’s debt to private banks, those banks took a haircut of about 50%. As astute readers will notice, 50 is a much bigger number than 1 or 2.

And finally, the serious shortfall in demand in Greece is almost entirely down to the DELIBERATE Eurozone policy of imposing that shortfall in demand on countries that are too far in debt. 

Conclusion: the 1 to 2% rise in debts in real terms is near irrelevant.

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