Wednesday, June 10, 2015

What Are The Six Characteristics Of Over-Indebted Economies?......GREAT INFO!

What Are The Six Characteristics Of Over-Indebted Economies?

The first is that transitory spurts in economic growth, inflation, wage rates, and bond yields cannot be sustained because debt is too much a constraint on economic activity. 

Debt is an increase in current spending in exchange for a decline in future spending unless the debt generates an income stream to repay principal and interest. Unfortunately we have too much unproductive and counterproductive debt that does not do that.

The second characteristic is that the over-indebtedness produces inherently weak aggregate demand and because of that economies are subject to downturns without cyclical pressures. 

Now that's not what a lot of people have experience with. We're familiar with downturns that occur when interest rates and inflation are rising and pent up demand is being exhausted, but over-indebted economies can turn down without those cyclical pressures…

The third characteristic is that productivity deteriorates but this is not inflationary—it's just another symptom of the fact that debt is controlling the overall environment.

The fourth characteristic is that monetary policy is ineffectual if not negative. 

Interest rates fall to very low levels close to zero and this takes out of the gain the price effect in monetary policy. The price effect is very important in economics. And that price is the short-term interest rates in monetary conditions. In debt constrained economies, central banks can expand their balance sheets but they don't really have good control over the money supply…

The fifth characteristic of over-indebted economies is inflation falls dramatically and increases the risk of deflation. And deflation is a different animal because it transfers income and wealth from the borrower back to the lender—it's a hard concept to understand.

And, sixth, in a low inflationary environment you get extremely depressed Treasury bond yields because the Treasury bond yield is basically determined by the Fischer equation, which says the nominal bond yield is equal to the real rate plus the expected inflation...the driving variable over time and as it goes down so does the bond yield. Those are the six characteristics.

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