Painful Deleveraging

In other words, there is no painless deleveraging. The price has to be paid by someone, and so the battle behind the façade of “beautiful deleveraging” is over whom the cost will be transferred to

If the government absorbs all the banks’ bad debts and runs large structural deficits, the cost is transferred to the taxpayers.  If the central bank prints money in excess in order to absorb the banks’ bad debts, inflation rears its head, and everyone with savings and who earns wages pays the price via a loss of purchasing power.

Though it is dismissed as “impossible” – and it is politically impossible, as the banks have captured the machinery of governance – banks could be forced  into insolvency and their assets liquidated on the open market.  This would clear the decks of impaired debt and distribute the losses to those who owned the impaired debt: pension funds, insurance companies, hedge funds, individuals, etc.  Every owner would share equitably and proportionately in the losses.

But this would upset the Status Quo’s power and wealth-sharing arrangement, and so it is dismissed as unworkable…

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