Page 45 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

mailbox) is happening already. Clearly, a further wave of
jingle mail would increase problems for the banks.
4. Replacing private debt with public debt. If governments
were to replace incurred losses on private debt with pub-
lic debt—essentially taking on the debt burden of its cit-
izens—consumers would be relieved of the problem of
how to manage their personal debt-repayment program.
Distressed banks would be recapitalized. The burden of
losses would now be borne by taxpayers. While this elim-
inates excess debt to some extent, it also creates a moral
hazard for financial institutions and for individuals.
There is also a big question as to how much more debt
governments can take on.
5. Pursuing an inflationary policy. The return of inflation
would lead to a decrease in debt levels in real terms, mak-
ing it easier for companies and individuals to service their
debt. While inflation may be unlikely in an economy
driven by credit liquidation, it is not impossible to gener-
ate. Governments and central banks, particularly in the
United States, might try to trigger an inflationary cycle
by being slow to reverse the aggressive monetary meas-
ures once the economy recovers—hence the call for “exit
strategies” by some experts.

At the time of this writing, all of these options are being pur-
sued in various ways. Even so, there is a continuing risk that the
combination of an increased rate of savings, a downward spiral
of bankruptcies, and a drop in demand will lead to further
unemployment and still lower asset values. Irving Fisher
described this phenomenon in his 1933 article, “The Debt-
Deflation Theory of Great Depressions.” He argued that the

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