Over the past couple years Automatic Earth has become one of my favorite economic blogs and Ilgari’s Christmas Eve post is a good example of why I venture there daily. Ilgari makes the point that the past year’s economic developments were, essentially, about the transfer of private debt to the public. This picture just gets worse and worse:

Many people today feel happy and positive when they look at the stock markets, because they think these reflect the real economy, and since the markets are up, things must have changed for the better in the past year.

But they haven’t, not below the surface. It’s all veneer and no substance. What actually has happened is that -virtually- no debt has been paid off in our economies, in fact we’ve added trillions of dollars more in debt. What is different from a year ago is that a huge part of the old debt and all of the new debt has been transferred to the public, and away from private business, in particular financial institutions (and, to an extent, carmakers).

So it comes down to the fact that people feel happy for being deeper in debt, and quite a bit deeper. Being the humans we are, we focus on the short term gratification which can be found in the Dow and a whole slew of increasingly fabricated numbers and government reports, while we conveniently ignore the enormous increases in debts, both public and private, that we will have to pay off down the line.

But, you say, it’s not as bad as it may look, because when the crisis is over, we will return to growth, and that will take care of the debt. That and shrewd dollar-inflation strategies by the wizards at the Fed and Treasury.

Really? What if the crisis lasts, let’s say, ten years? All that needs to happen for that is for home prices to keep falling, or even stagnate. And that seems a near certainty.

The US has no private mortgage market left, or even a viable housing market. Neither do Canada, Britain, Holland and many other countries for that matter. Homes are sold and mortgages approved only because the state takes them off the lenders' hands and books the minute the deals are closed. The loans are then securitized and sold on to, in America’s instance, the central bank. In other words, all of the risk for all of the entire loans processed in this fashion lies squarely with the taxpayer.

And that is not a good thing if prices keep dropping. When unemployment won’t come down. When governments start raising taxes because sovereign debt goes through the various rooftops.

The main problem’s not even paying off the principal of the debt. That won’t start happening for years to come, if ever. It’s paying the interest on the debt that will become the most immediate headache.


Read it.




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