Not the end of the World - FT article

JP45

There was an interesting article by Jeremy Grantham in yesterday's FT, outlining the various ways in which the US economy might adjust to the recent massive loss of perceived wealth (for which similar options presumably apply to the UK).

http://www.ft.com/cms/s/0/e85a3c16-0ddc-11de-8ea3-0000779fd2ac.html

As the article points out:

$50,000bn of perceived wealth in the US (stocks and real estate) has declined to below $30,000bn, leaving the original $25,000bn of private debt stranded. Now born-again prudent bankers would not surprisingly prefer better ratios of collateral protection than before. Where $50,000bn of perceived asset value supported $25,000bn in debt, they would presumably prefer the current $30,000bn to support about $12,000bn.

With brutal speed, we have realised we are not rich after all and that we are dangerously under-pensioned and overdebted. We suddenly face a long period of frugality that in the long run may be good for us.

The article outlines four ways to get to a more supportive balance of private debt to capital, one of which involves reducing debt through inflation.

What I found particularly interesting is the author's claim that an average of 2% a year for seven years might be acceptable.

One of my concerns throughout this crisis has been the fear that the UK monetary authorities might deliberately engineer a dose of high inflation (1970s style) as a way of reducing the debt burden. So it was quite reassuring to read the author's suggestion that low inflation would suffice (assuming the same holds true for the UK), especially as 2% a year corresponds to the Bank of England's inflation target.

StevieJ

Thanks for some positive :T

purch

the US economy might adjust

The US economy, the UK economy and the World economy will all adjust to the new realities.

The adjustments may be tough for many/most but ultimately it's not the end of the World.....just maybe the end of the World as we thought we knew it, and the start of something different, and maybe better.

smartn

Must admit I was wondering about double digit inflation for several years, 2% a year for 7 years would do very nicely. Lets hope GB doesn't feel the need to acheive things a lot quicker because of re-election.....

lostinrates

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Rochdale_Pioneers

StevieJ wrote: »

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chucky

how come the usual doomers don't contribute on any good news threads

Cannon_Fodder

sorry to be so slow Chuck, I left work early...

"We suddenly face a long period of frugality that in the long run may be good for us."

The problem with this "easy way out" is that a combination of the greedy, impatient and stupid will scupper it, however desirable the end result.

treliac

Cannon_Fodder wrote: »

sorry to be so slow Chuck, I left work early...

"We suddenly face a long period of frugality that in the long run may be good for us."

The problem with this "easy way out" is that a combination of the greedy, impatient and stupid will scupper it, however desirable the end result.

We can only hope some learning takes place and that politicians aren't too distracted away from the common sense pathway by their desire for re-election.

chucky

Cannon_Fodder wrote: »

sorry to be so slow Chuck, I left work early...

"We suddenly face a long period of frugality that in the long run may be good for us."

The problem with this "easy way out" is that a combination of the greedy, impatient and stupid will scupper it, however desirable the end result.

i wasn't referring to you princess

who is to say that the greedy, impatient and the stupid are actually the clever ones.
for example look at those who are holding massive HPI in the back pockets and have lived a good life instead of those who have put their life on hold just to get a cheap house.

it's all a matter of the context it is read