Deflation and Debt Restructuring
By JC Collins
Over the last week the International Monetary Fund has increased its communication on the sustainability of debt. It called for the restructuring of Greek sovereign debt, and has now stated that Japan’s debt is unsustainable.
None of this is surprising, as most who follow such things have known for a long time that there is a level of sovereign debt in the world which is unsustainable. The fact that the IMF is now officially drawing attention to this fact has more to do with the preparation for the next stage of monetary easing.
The progression from Quantitative Easing to SDRM (Sovereign Debt Restructuring Mechanism) is something we have covered consistently here on POM. Most readers will recognize that sovereign debt restructuring is the inevitable outcome, or evolution, of the unwinding, or deflation of the existing international monetary bubble.
The deflation which is now increasing with incredible speed around the world first started back in 2007. The policies of QE and low interest rates served to postpone the unwinding and allow for the international monetary institutions to work with governments on evolving the framework from a unipolar to a multilateral architecture.
Given the fact that inflation helps reduce government debt and deflation increases government debt, open talk from the IMF on the need for debt restructuring during a period of mass deflation is not coincidently.
The IMF has suggested that no country be allowed to default. The debt restructuring which will occur in the coming months and years will reduce sovereignty and pave the way for further consolidation. This is occurring real time in the European Union where the solution to the sovereign debt challenges in that region, brought to the forefront by the crisis in Greece, is to create a more dense union between the member countries.
The President of France, just days ago, suggested the creation of a United States of Europe, as the solution to the EU crisis. Many years down the road we will hear the call for a United States of the World. This will correspond with the introduction of the bancor, as the logical evolution of the SDR.
Almost two years ago POM stated that the sovereign debt crisis would be used to reduce the sovereignty of countries and consolidate more.
As we see the crisis continue to unfold, this is exactly what is now being openly discussed. When the IMF begins to state that a country like Japan, which isn’t a member of the European Union, also has a debt which is unsustainable, can we not expect a similar solution to be offered.
The greatest debtor nation is the United States itself.
There are some misconceptions about deflation which are difficult to see past. The loss of asset value is not an end unto itself. Corresponding to this depreciation of assets and commodities is a reduction in the cost of living.
Factor in the inevitable reduction in wages that will eventually accompany a deflation event, and we can expect that not much will change when it comes to standard of living and quality of life.
Such things are kept in balance.
The loss of growth and employment during deflation will be temporary. As SDR liquidity sets off a new cycle of inflation, things such as gold, and commodities, will once again appreciate in value as global growth begins to increase on the back of massive infrastructure projects in the developing world, and the repair, or replacement, of infrastructure in the developed world.
The transition will be challenging. There is no doubt.
Many will loss and some will gain. That is the way of things. The way it has always been.
Many will feel foolish for not seeing the illusion of disproportionate equity. The social degradation which can be found in the most indebted nations, such as Japan and America, are directly connected to the expansion of unsustainable and destructive equity in assets which have expanded with the credit bubble.
This is also not a coincidence.
The roaring 20’s, where self-degradation and the never-ending party rode the crest of money expansion, came crashing back down into the realities of the dirty 30’s. I sometimes consider this period to be the beginning of the end for personal sovereignty.
The credit bubble which began to form shortly after the collapse of the Soviet Union increased the process of removing public sovereignty.
Deflationary periods have always been used to wind regulation and governmental control tighter. The same thing is happening now on a global scale.
The debt restructuring which will take place will hand the sovereign control of countries and regions over to international institutions. The consolidation of the world is inevitable, as it represents a form of returning to the whole, or fragments seeking unification.
Perhaps sovereignty itself is unsustainable. Perhaps there is a balance which hasn’t yet been recognized, or considered.
The material world seeks consolidation, as is apparent in the early formation of tribes and ancient empires. The only thing we can do is understand this process of inherent consolidation and influence change which will be meaningful and lasting.
This is likely becoming the unintended purpose of POM. – JC