"The relentless forces of debt, deleverage and default were set in motion by the financial market excesses of the last decade. This is hardly surprising, but the details are sobering...
Now there are a number of signature signs on our radar which suggest that the deleveraging process may just be getting under way, exerting a significant drag on GDP growth. In a sicklier global economy, players are desperately trying to raise debt and to export their way out of trouble. When every government is struggling to increase borrowing, competition amongst them will drive up the cost of capital, with the weakest economies paying the highest price. The deleveraging process is likely to result in painful global economic contraction.
While we cannot say for certain when deleveraging will gain momentum, we do know that deleveraging has followed nearly every major financial crisis in the past half-century. In the past, governments have tried to counter deleveraging by creating rapid growth through fiscal or monetary stimulus; exports via devaluation; or preparation for and participation in war. These alternatives are all extraordinarily challenging particularly when every government is trying to achieve the same result. Engineering an easy escape becomes a competitive sport. Growth is tough to achieve. Nation states face three unpalatable options: outright default; inflation; or severe belt-tightening in which private consumption and public spending are dramatically cut."
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