So, when does this end? No one can say but we don’t seem close.
The saying ‘you go broke slowly and then all at once’ is probably instructive. There are two key ways to resolve over-indebtedness:
• Inflation: With lots of wage inflation, workers get more money, which reduces the real value of their debts. This is relatively painless for most involved and it is how central banks would like the transition to occur.
The reality is the methods tried to date haven’t created inflation - and Japan is a 20-year example of trying to create inflation but failing.
In practice, central banks have lowered interest rates to try to spark inflation and in doing so they have increased the value of assets, which has increased inequality. And we are largely back to square one…
The irony is we know exactly how to create inflation: print money and give it to poor people.
Economists generally don’t want this to happen because in the hands of politicians it gets out of control (Zimbabwe, Weimar Germany) and causes hyperinflation.
What central banks are currently trying to do is create inflation in any way possible without actually printing money. They are failing.
• Debt forgiveness/write-offs: There have been lots of opportunities to do this – basically if a rich person lends to a poor person who can’t pay then the rich lose the money. It’s a great way of transferring assets out of the hands of the rich.
Unfortunately, what happened instead is governments everywhere bailed out the banks. The decision was made to ‘extend and pretend’ in high-profile over-lending cases like Japan (zombie companies in the 1990s), the US (housing loans in 2008), Europe (Greek and peripheral debt in the last seven years) and China (the housing market in the early 2000s and probably the housing market plus a range of state-owned entities again in the not-to-distant future).
It looks like governments will continue to take a lot of pain over a long period of time rather than let lenders take responsibility for mistakes.
In the short term, what could give us a burst of inflation is if a populist leader was voted in (say in the US) and decided to dramatically increase government debt (say by giving massive tax cuts and/or spending on infrastructure).
If the policies were designed so the 99 per cent benefited more than the 1 per cent, then a lasting solution might be achievable. Instead, it looks as if most of the benefits of any US tax reform will accrue to the 1 per cent, solving nothing.
Long-term trend six: increasing global trade