Prepare for Worldwide Currency Devaluation

The conclusion to Are We Facing a Global “Lost Decade?"
Koo’s balance-sheet constrained analysis is a sound explanation for Japan’s sustained stagnation, and makes Japan’s situation a foretaste of what the rest of the world will experience now that it has joined Japan in the trap of excessive private debt. China, the Euro-zone, Japan, and the USA are all private debt constrained. And thus it is not inappropriate to posit the idea of a “global balance sheet recession.”

The policy implications of this analysis are obvious, if challenging. Firstly, a way must be found to reduce private debt levels drastically, without at the same time triggering the collapse in aggregate demand from such a deleveraging itself. Secondly, the private debt to GDP level must be treated as a crucial macroeconomic indicator, in the way that inflation and unemployment are now. Fortunately, methods to achieve these aims can be devised, but they go against the grain of conventional economic policy.

Private banks are not the only institutions that can create money: so can the government via its Central Bank. Unfortunately, Central Banks in general have not done this in response to the crisis, but have instead created additional Reserve assets for private banks by buying securities from them under the policy of “Quantitative Easing.” This alters the composition of bank assets—and encourages purchases of shares and property, thus inflating asset prices—but does not inject money into the deposit accounts of the private non-bank public, which is what is needed if money is actually to be created and aggregate demand increased.

A shift to what has been described as “People’s QE” could create money by directly crediting household and private non-financial corporation bank accounts. This same capacity could also reduce private debt if debtors were to be required to pay down their debts, whereas savers—those without bank debt—would receive a cash injection. Many other ancillary policies would be needed, but such a policy would enable private debt to be reduced without reducing aggregate demand. Richard Vague also suggests several mechanisms for private debt reduction which are consistent with current banking practices (Vague, 2014).

The tragedy is that although there are methods by which we could escape the global private debt trap into which we have fallen we are nonetheless prisoners of an economic orthodoxy that will prevent us from employing them... The main barrier here is simply the ignorance of the supposed experts on economics about the nature of money. While mainstream economists continue to spout naïve arguments about money and banking, the politicians who rely upon them for guidance are unlikely to attempt anything other than the poorly targeted and largely ineffective policies that Japan has persisted with for the last quarter century. A global “Lost Decade” is entirely probable.
There is too much debt and until it is removed, economic growth and inflation will only go lower. Eventually, the debt burden will be eliminated as a matter of course. If politicians do not choose to destroy their currencies, the market will do it for them. Or the market will destroy the debt, at which point the politicians will panic and destroy the currency in response.

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