As I work my way through the very timely The Ascent of Money, by Nial Ferguson, I saw this interview he recently gave to Vanity Fair.
When speaking about the proposals to lessen the impact of the current economic downturn,
The reason that won’t work this time, and this is the key point, is that the whole U.S. economy became excessively leveraged in the last ten years. The debt burden, as a proportion of G.D.P., is in the region of 355 percent. So, debt is three and a half times the output of the economy. That’s some kind of historic maximum, and those debts aren’t going away.
What he sees coming along,
In the past, when excessive debt burdens were accumulated by government, they tended to do one of two things: either they defaulted—this is the Argentine solution—where you say, “Ah, I’m sorry, I’m afraid we’re not going to be able to meet the interest payments this month, and never again will we make the interest payments.”
The other scenario is inflation, where the real debt burden is eroded because the money that it’s denominated in loses value.
I don’t think we’re really going to be out of the woods here until something of that sort happens to the huge debt burdens of the U.S. economy. Either these debts will have to be fundamentally written off in some way, or inflation will have to reduce the real burden.
Read the whole thing. Then go buy gold.