Endgame: The End of the Debt SuperCycle and How It Changes Everything

The big difference between Japan or the United States and countries that have experienced hyperinflations is that the central banks are not monetizing most of the deficit. If they were to do that, then we would be one step away from paying quadrillions of dollars for a stamp or a sandwich

A critic of this strategy for getting rid of our debt could point out that no one would lend to us again if we did that. Hardly. Investors, sadly, have very short memories. Markets always forgive default and inflation. Just look at Brazil, Bolivia, and Russia today. Foreigners are delighted to invest in these countries.1

Why not tell anyone who starts a business within the next three years that if he sells his business after five years, and has created some minimum number of new jobs, that he can sell his business when he wants for zero capital gains? That seems to us an incentive we can believe in.

The surplus liquidity isn’t likely to ignite an inflationary boom in the U.S. economy if consumers refuse to borrow and spend. But that liquidity has to go somewhere, and emerging markets look like the most likely destination.

This squares solidly with the work done by Rogoff and Reinhart, showing that when the debt of a country reaches about 100 percent of GDP, there is a reduction in potential GDP growth of about 1 percent. As we wrote earlier, government debt and spending do not increase productivity. That takes private investment. And if government debt crowds out pr

Saint Milton Friedman taught us that inflation is always and everywhere a monetary phenomenon. A central bank, by printing too much money, can bring about inflation and destroy a currency, all things being equal. But that is the tricky part of that equation, because not all things are equal.

As part of its QE program, the Bank of England has so far purchased £200 billion ($320 billion) of U.K. sovereign debt (known as gilts). It may yet buy more. The Bank of England now owns almost a third of all outstanding gilts, as Figure 13.4 shows. This dwarfs the QE programs in the United States or Japan.

Job Creation and Loss by Firm Age (average per year, by year-group, 1992–2005)

Today, interest rates are exceptionally low and the growth outlook for advanced economies is modest at best. This leads us to conclude that the question is when markets will start putting pressure on governments, not if.