Bankers Must Take a Haircut UPDATE 2.20 HAIRCUTS WORK

Barry, My Liege:

Hhere's a link to a Bloomberg story about Iceland - their banks forgave debt and the country is growing.

Good news - it CAN be done:
http://www.businessweek.com/news/2012-02-20/icelandic-anger-brings-debt-forgiveness-in-best-recovery-story.html

Your faithful servant.



Hey Barry:




In a copyrighted article, economist Michael Hudson suggests a new economic model to correct misperceptions about current trends which can arise from using older models.

Here is his first paragraph:

'Now that the Bubble Economy has given way to debt deflation, the world is discovering the shortcoming of models that fail to explain how most credit creation today (1) inflates asset prices without raising commodity prices or wage levels, and (2) creates a reciprocal flow of debt service. This debt service tends to rise as a proportion of personal and business income, outgrowing the ability of debtors to pay—leading to (3) debt deflation. The only way to prevent this phenomenon from plunging economies into depression and keeping them there is (4) to write down the debts so as to free revenue for spending once again on goods and services.'

© Michael Hudson, Oct. 27, 2011

The entire article is available here:
http://discussion.worldeconomicsassociation.org/wp-content/uploads/Hudson-Model.pdf

This is interesting beyond academic economics inasmuch as he draws the conclusion that creditors will have to renegotiate debt levels in order for the world's economies to find growth.

At this moment Greece's creditors are hedging on previous promises to reduce debt levels to manageable amounts. Such a reduction is necessary to prevent further economic and social deterioration in Greece and the entire EU by contagion.

One of Mr. Hudson's points is that most debt is used to purchase previously produced assets like houses and office buildings; so, taking on that debt does not result in any new production added to the GDP.

The resulting debt service simply reduces cash flow available to purchase new products. This is another reduction in Aggregate Demand.

Stated as clearly as possible, unless creditors voluntarily renegotiate debt levels to manageable debt service payment for nations, businesses and individuals, the economy will likely enter a further recession.

It is likely that most citizens and nations will find current debt levels unacceptable and will default, unless some significant adjustments are made to their debt.

Your pal,