January 11, 2011
It was obvious, the Christmas break wasn’t really going to solve the fiscal problems faced by Portugal, Belgium and Spain. It was simply a short postponement to the ongoing calamity. A ceasefire if you will.
But here we are, back again. Shots are being fired and the fiscal wheels are sure to fall off soon.
Who will be first? My guess is that it will be Belgium in real trouble and Portugal that actually accepts assistance, but that is just a guess. By the time we get to Spain, will there be any money left?
The real fear ought not to be this though, no matter how frightening. The real fear ought to be rising costs, aka inflation.
With the mega amounts of borrowing that have been going on over the recent months and years, anyone that mentions deflation as a possible problem is a fantasist. In asset prices, perhaps, but for whole economies, no way. Big inflation is approaching. BIG.
The rising costs in food prices and energy had to impact inflation numbers eventually. No matter how far removed from reality those numbers may be, it had to arrive.
On the one hand, this is useful for borrowers with large amounts of debt (like governments). They get to repay those debts with currency worth less than the amount borrowed. Those lenders and people living on fixed incomes will find things tough.
But the real problem is the impact this will likely have on interest rates. How do you fight inflation? You increase interest rates. Just do a quick Google search for ‘Paul Volker’ and find out how he beat inflation in the United States. It gets squeezed out, painful drop by painful drop.
There are real impacts to that though. Rising interest rates increase the cost to service debts. Countries on the verge of bankruptcy already will struggle to maintain payments. Rising interest rates might also strengthen some currencies and not others making economies suddenly unable to import or export. People find it harder to maintain a standard of living. Civil unrest becomes ever more likely – or since we have been seeing it already – perhaps it becomes ever more violent.
This certainly isn’t good for democracy. It certainly isn’t good for economies that are wobbling. It certainly isn’t good for the general public finding it harder to eat.
Can policymakers do anything? I fear not, but that will be the challenge.financialguy