October 14, 2008
So how much government borrowing can one economy take?
Really? Imagine, hypothetically, that a country had banking problems and that this was in large part due to excessive borrowing within corporations and by individuals, how much sense can it make for the government to borrow to bail out the borrowers?
So we all know that governments are faced with very tough decisions right now and I do not pretend to have all the answers. I mean really, I do not pretend to even know all of the questions…
But there is only so much government borrowing that can happen before a currency begins to devalue. Right now, since every government is borrowing at an alarming rate, it might be wise to presume that they will all be going down together. If it happens like that, who can say?
However, there has been a lot of government borrowing already for many years. The UK is a prime example. The following link shows that the problem is starting to get out of hand.
I know that inflation can be imported as well as home grown and that a modern economy can cause inflation in many, many ways. This is not a quick and easy topic – I am aware. But, one of the major causes of inflation is simply that of money creation. So much money has been created in the past 10 years or so that a period of high inflation is a near cert sooner or later. It seems that sooner might be the case.
The real world impact of inflation at 5% is tough. But the real problem is that anyone and everyone within the world of finance has believed for the past several years that the inflation statistics are not very real. Many believe that the numbers have been manipulated to make a nicer picture. If that is the case, then real inflation – the kind we feel in the pocket and not see on a TV news report – might be several percentage points higher.
Of course, none of us knows the real scale of this problem.
In the same way that markets are currently “unwinding” trillions of dollars of derivative contracts, the inflation monster will need to be “unwound” from the economy as well. Without considering a credit crunch, this will probably bring very considerable economic pain.
The signs are not good.financialguy