As Krugman stated falling home prices lead to the feared phenomenon of “debt deflation.”
By common sense when businesses get into financial trouble, they sell assets and use the proceeds to pay their debt. Such selloffs are self-defeating when everyone does it: if everyone sell his assets at the same time, the resulting plunge in market prices undermines debtors’ financial positions faster than debt can be paid off. So we get into a vicious circle. The severe economic slump is some moments away. The same goes for the property market all over the world. Debt deflation at these moments is the real threat and unfortunately key financial players are highly leveraged.
The current U.S. financial crisis is similar to what happened to Japan back in the late ‘80s. Keep in mind that the Japanese crisis lasted almost a decade. The response to a Japan-type financial crisis was supposed to involve a very aggressive combination of interest-rate cuts and fiscal stimulus, designed to prevent spillover effects to the real economy.
What we currently face is aggressive rate cuts and push of funds into the private sector. Results show that the funds were not led to the right companies or at least it was not given the right way. There were no Tax reliefs at all.
In a few words, humanity is under heavy Deleveraging. The problem is not deleveraging itself. The problem is that nobody knows when this will end because nobody really knows the real leverage levels. It can be stated that the black hole of leverage will swallow everything before it disappears..
Overall, supporting the economy with government funds seems to be a good idea BUT governments should proceed to other actions in order to relief the corporate struggle. Just throwing money will not lead anywhere..the black hole will destroy everything. Central bank governors and Governments Should get the big picture. They just focus in specific aspects of the crisis and in the long run this may be the reason of the upcoming economic meltdown. Taking decision under panic is the worst thing that can happen. We should learn from the Japanese economic crisis and act in accordance. Of course there are differences but there are a lot of indications which show that we will be led there..
By common sense when businesses get into financial trouble, they sell assets and use the proceeds to pay their debt. Such selloffs are self-defeating when everyone does it: if everyone sell his assets at the same time, the resulting plunge in market prices undermines debtors’ financial positions faster than debt can be paid off. So we get into a vicious circle. The severe economic slump is some moments away. The same goes for the property market all over the world. Debt deflation at these moments is the real threat and unfortunately key financial players are highly leveraged.
The current U.S. financial crisis is similar to what happened to Japan back in the late ‘80s. Keep in mind that the Japanese crisis lasted almost a decade. The response to a Japan-type financial crisis was supposed to involve a very aggressive combination of interest-rate cuts and fiscal stimulus, designed to prevent spillover effects to the real economy.
What we currently face is aggressive rate cuts and push of funds into the private sector. Results show that the funds were not led to the right companies or at least it was not given the right way. There were no Tax reliefs at all.
In a few words, humanity is under heavy Deleveraging. The problem is not deleveraging itself. The problem is that nobody knows when this will end because nobody really knows the real leverage levels. It can be stated that the black hole of leverage will swallow everything before it disappears..
Overall, supporting the economy with government funds seems to be a good idea BUT governments should proceed to other actions in order to relief the corporate struggle. Just throwing money will not lead anywhere..the black hole will destroy everything. Central bank governors and Governments Should get the big picture. They just focus in specific aspects of the crisis and in the long run this may be the reason of the upcoming economic meltdown. Taking decision under panic is the worst thing that can happen. We should learn from the Japanese economic crisis and act in accordance. Of course there are differences but there are a lot of indications which show that we will be led there..
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