Who will win the race to the bottom?

[Smiling_Dave]

Freidrich,

I totally agree with your last post. The banks are doing it out of fear they will go out of business if they do otherwise.

Which means, I hope, that we agree they are not doing anything “criminal”, legally or morally, or in the sense of being bad for the economy as a whole. It is the first economic duty of a business to not be stupid and destroy itself. One may as well accuse every resaturant of being criminal for not giving away all its meals for free.

[Autolykos]

@Kakugo

#1 The main difference between this Depression and the previous ones is malinvestment is not being liquidated on a scale never seen before. Bad loans are staying on the books (either the governments’ or the banks’) and are not even “swept under the rug” like China did in 2001. Not everybody agrees to our view that cheap credit generates bubbles and bursts but most agree malinvestments need to be liquidated to create the climate for further “growth”.

Right, and why isn’t that malinvestment being liquidated? Because the government and the big banks won’t let it. A lot of the malinvestment of the lead-up to the last depression was liquidated (literally) during World War II and its aftermath - but not all of it. Again, that’s because the government and the big banks wouldn’t let it.

What the world has been going through for almost a hundred years (at least) has been a continual “ratchet effect” with respect to malinvestment.

@Kakugo

#2 Simple. They are not lending. Without lending there cannot even be a conventional bubble that would allow for lower interest rates (based on economic outlook) increased taxation revenues (allowing to better service the debt), albeit for a short time.

I think you have it backwards. Lower interest rates - namely artificially lower interest rates - allow for bubbles, which allow for increased tax revenues. However, tax revenues aren’t strictly needed to service government debt, as the government can just roll over the existing debt with new debt (provided there are enough willing buyers of the new debt) or its central bank can monetize the debt (which is really the same as the first thing, with the central bank as the debt-buyer of last resort).