...On the face of it, we are able to sustain far more private debt to GDP than we were 50 years ago because taxpayers are prepared to do far more to prevent defaults:
...The positive side to defaults, if there is one, is that it stops inefficient businesses from draining capital, and allows banks and investors to look for projects that have a better chance to grow. An environment with ever lower rates and predictable intervention to avert defaults is also an environment in which we might expect productivity to endure a steady decline. And Reid’s numbers suggest that that is exactly what has happened:
...In that decade the volume of dollar-denominated bonds has more than doubled, to satisfy the appetite for yield created by the background of virtual zero interest rates. This has happened even though the inventories of big banks that make markets in bonds have collapsed to levels last seen almost 20 years before the crisis, largely as a result of banking re-regulation:
With ever more debt, on ever sketchier terms, against the backdrop of a lackluster economy, it should be no surprise that financial crises are growing more common.
...the era of the two world wars and the Depression saw the heaviest concentration of financial crises in history:
The chart also shows that crises have intensified in recent years. But what sticks out like a sore thumb is the period from the war until about 1970, when Deutsche Bank recorded no financial crises at all. This of course overlaps directly with the Bretton Woods era of exchange rates fixed to the dollar, which was fixed to gold, and heavily regulated banking.
...Until 1951, the Federal Reserve was under orders to keep bond yields down and effectively force everyone to lend to the government at a cheap rate. With timing that cannot be coincidental, the New York Fed published this paper on how financial repression worked earlier this month.
As it stands, the ride toward the abyss is bringing an ever more sluggish economy and an ever deeper sense of injustice in its wake. How might this end other than with capitalists confronting the devils they most fear? Reid suggests the most likely conclusions are either financial repression, or a dose of inflation. And as nobody in the markets is positioned for inflation at present, that might just be the position of maximum pain.
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