The World Is De-Leveraging – There’s No Easy Way Out

World financial leaders are meeting at the idyllic Villa d’Este on the banks of Lake Como in northern Italy.    Unlike the magnificent view,  the subjects of discussion are depressing.   The subject is the same as it has been for months and will be into the foreseeable future:   how to deal with governments in Greece,  Italy,  Portugal,  and elsewhere which have spent money they have borrowed and can’t pay back.
For most governments,  take the U.S. for example,  there are two options,  either  default on your debts or print more money.   We are doing the latter in the U.S. , printing more money that is.   Of course they don’t call it that…sounds bad…so they call it “buying back bonds”.    But where does the money come from when the Fed buys back Treasury bonds?   They print it of course.  That paves the way to issue more bonds !   By this simple two-step procedure the Fed and the Treasury disguise the fact that they’re printing money.


Flash back to the Villa d’Este.   Why don’t Greece,  Italy and Portugal just print more money?   Well they can’t – they don’t have their own money – they have the Euro and they can’t print it.   Only Brussels and the European Union can print it.   And the E.U. nations don’t want to print money to  “buy back bonds” from Greece et al, because they use the Euro too,  and they don’t want to devalue their own currency.



When you borrow it’s called “leverage” and it’s fun…you have more money to spend.   When you have to pay it back it’s called “de-leveraging”  and it’s no fun…you have less to spend…a lot less. This happened in Japan about ten year ago,  resulting in the “lost decade”.


The only good news on the horizon are the job numbers in the U.S., contrary to the media slant.   Job growth was flat in the most recent reported periods,  but productive private sector jobs actually increased,  while unproductive government jobs decreased.   If we can keep that going, then growing the economy in the form of gross domestic product will increase and we can begin to grow our way out of the problem. – DSMW