default vs currency debasement

Economics Economics Questions
1

Higher inflation, debt default or currency debasement look to be the only viable options going forward for major economies, starting with greece. This coming recently from Rothschilf Private Banking Trust, Head of Investments.

This is something the world has been slowly coming to grips with over the past few months, but it’s set to become issue number one over the next few weeks as the perfect storm coonverges on the global debt markets. The technicals and fundamentals are now aligned for historic moves in global markets, but the outcome is anything but certain.

Personally, I see massive debt deflation affecting paper assets whose valuations are based on interest and future cash flows. Meanwhile the RESPONSE to this debt deleveraging will be government prompted money-printing producing a highly/hyper inflationary reaction in real assets.

I am comfortable with that outlook, but I am still very unclear on the outcome of higher inflation vs. government debt default and the subsequent effect on the global markets. Based on history, we’ve seen “middle of the road” examples in Russia and Iceland, etc. We’ve seen extreme examples in Zimbabwe, Argentina, weimar, etc… But I find it difficult to compare the old scenarios with the current framework in order to assess the probability of government decision-making between outright default, stealth inflation, and outright and blatant currency debasement.

They all have their advantages/disadvantages relative to current conditions, but which way will they lean?

I think we are headed for a greek default, i.e nonpayment, and eventual expulsion of fiscally weaker countries from the European Monetary Union.This will lead to global panic and total disruption of long-term socio-politcal goals (i.e united europe) which will create a counter-reaction that results in no more defaults but currency debasement on a global basis leading to runaway inflation and eventually hyperinflation as the currencies collapse under the weight of the debt these currency economies are carrying.

I’d love to hear some solid austrian views on the default vs inflation/debasement question GOING FORWARD from this point, based on what we’ve seen so far during this crisis.

What would be the effects of higher inflation versus currency debasement and/or default? Would love to hear others views.

2

Your text assumes that governments can not cut spending. In other words they can not cut defense/war spending, old age give aways and govenrment pensions. They may have to do so as voters revolt as in the USA in 1994 or simply refust to pay taxes as they are doing in Greece.

You are also assuming that only Country Based Fiat Currencies will be the ones. There are experiments in the USA and elsewhere using silver and/or gold as currency. As the value of the major currencies continues to drop or the drop accelerates people will turn to these metals. As this happens governments will be forced to act to sure up their currencies as they risk having all paper assets have dropping values.

3

Jim Rogers (my #2 most respected investor behind Marc Faber) says he is currently long the Euro because it is oversold and not going to collapse tomorrow, but that he believes the Euro is doomed as a currency in the long-term (he says the same of the dollar and the whole global paper money regime). Greece and the PIIGS have essentially done to the Euro what the major US banks did to the dollar… they bet that they would be bailed out even as the ECB and Fed swore on their mothers’ graves there would be no bailouts of the financially irresponsible. Greece/PIIGS/US banks were right, they were eventually bailed out. Their ridiculous, lossy investments (in the case of US banks) and profligate public spending (in the case of PIIGS) turned out to have been the right bets. And it doesn’t matter that TPTB have largely succeeded in concealing the extent of the bailouts from the general public because the general public does not matter. The people that matter are the bond traders. Once bond traders decide that the system is unsustainable, it’s game over, and the bond traders are under no illusions about the size and scope of these bailouts or about the extortionate circumstances under which they were granted. Without private lenders, Western governments will have nowhere left to go to finance their absurd deficits but their central banks. This will spark a rapid spiral of inflation as new money flooding the system drives investors to not only jump out of bonds but paper currency, as well, and seek to stash their wealth in any real asset that depreciates at a rate less than the astronomical inflation rate (basically, any real good).

But I expect there to be widespread war or some major global catastrophe, I don’t think TPTB will take this lying down. While the violence-elites will never succeed in repealing the laws of economics - trying to use their central banks as the long-sought-after philosopher’s stone that can turn lead (or paper, in this case) into gold - they certainly can let all hell loose and try to drive up demand for their ocean of paper money by increasing the overall demand for money (wars/catastrophes make people want to stay as liquid as possible).

Sorry to be such a downer.

Clayton -