a “beautiful deleveraging” in which equal doses of austerity, write-downs, and inflation gradually lighten the load of impaired debt.......inflation is modest, write-downs of bad debt are gradual, and austerity is not too severe. Given enough time, the leverage and debt are worked off without requiring any structural change to the Status Quo.
Understandably, the Status Quo has embraced this solution for the appealing reason it doesn’t change the power structure at all. Everyone currently in charge remains in charge, and everyone who owns outsized wealth continues owning outsized wealth. Rather than falling onto the politically powerful “too big to fail” banking sector, the pain of deleveraging is spread over the entire economy. There is no such thing as painless deleveraging, so the “solution” is to distribute the pain over hundreds of millions of people. That’s what makes it “beautiful” to the Status Quo: It doesn’t cost them either their power or their wealth........... BUT...........
Two things can turn beautiful inflation into ugly inflation: Wages don’t inflate along with prices and the currency depreciates as money is printed excessively. This might not matter for a nation that is a net exporter of goods and services. But for nations that import essentials such as oil and grain, this is a catastrophe, as wages are flat while the cost of imported energy and food skyrocket. Households have less money to spend, and servicing debt becomes increasingly burdensome.
This is ugly inflation: Household incomes decline in real terms, the rising cost of essentials squeezes discretionary spending, and servicing debt becomes more difficult. Households not only cannot afford new debt; many have to default on debt just to survive. Bank lending falters and defaults rise, eroding banks’ solvency. As household incomes stagnate, government tax revenues decline as well.
In ugly inflation, everybody loses.
Welcome to the United States of Ugly Inflation. Real household income (i.e., adjusted for official inflation) has declined 8% since 2007; the cost of oil, medical care and higher education has climbed; and government revenues have stagnated even as demand for government services has increased.
As a result, the entire beautiful deleveraging scenario is at risk. Austerity carries a high political cost, and central bank printing appears to be fueling ugly inflation. Behind the “happy story” façade, falling incomes mean that household deleveraging is an illusion, along with bank solvency.
What else is at work here? Where is this leading? Possibly to destinations many reading this may not expect ...............
a working example
The bursting of the Japanese bubble, now in its third decade, has ravaged salaries, bonuses, household budgets, and thus allowances—and spending. The zero-interest-rate policy that the Bank of Japan has perfected, extensive quantitative easing, and two decades of stimulus budgets that have left Japan saddled with the worst debt-to-GDP ratio in the world ... all conspired against the hapless salaryman. He works harder and longer than ever before, for less pay, and even his lunch money is getting cut.
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