The mother of all bubbles

Governments on pump against the crisis worldwide – the consequences could be devastating

A new economic power package here, a record budget there – if the private sector is in recession in recession in all countries and the banking system must be saved with unimaginable sums in front of themselves, budget discipline does not matter anymore. The IMF estimates that the governments of the Zwolf’s large OECD states must take over 10 trillion US $ to new debts to prevent the consequences of the financial crisis. But these estimates are conservative and rather a Best Case scenario.

The former IMF chief locomotive Kenneth Rogoff stops a new debt of 15 trillion US $ for more likely. The trillion-dollar question is therefore: who should actually buy the whole notes? It is likely that the superpoint of government papers drives the interest in the high. This could cause the economy again under prere and the only way out was inflation. The central banks had to take an observer position in this case, as countermeasures were able to burst the state debt bubble on monetary policy.

No alternative to debt?

In one point, the economists agree – the consequences of the global economic crisis in the 1930s had to be mitigated if the governments had taken more money back to the economy at that time to the economy. This realization has prevailed today.

In the US Prasident Obama is already planning the second economic postpaket for this year, and in Berlin, the voices are louder that demand the economy about tax cuts. If you give more money or take less money, this must finance this about new debts. These measures are paid in the future.

Macroeconomically, such debt-financed stimuli are well useful. The more the economy receives again, the sooner the tax revenue and decline the expenses. If debt-financed stimuli really revive the economy, finance themselves in this way. The problem with this approach is merely that they can eighty other factors that can be made by excessive new debt.

The debt bubble

If one analyzes the new debt of industrialized countries, it is noted that in addition to the expenditure increases in the official state budget, there are still many shadow households, which will be denied the costs with which the banking system should be saved. Also these costs must be counterparted.

So if one speaks about the public debt, one must also consider the entire debts of the state, and not only the deficits in the official household. The cost of the financial crisis for the US will be 2 trillion US $ this year – around 14% of gross domestic product. How high the total cost of the financial crisis will be fails for the public sector, you can currently only speculate. The IMF estimates that the US has taken nearly 5 trillion US $ new debt to prevent the effects of the crisis – this was 34% of gross domestic product. Before the collapse of the InvestmentBank Lehman Brothers, the public debt was around 9.4 trillion US $ – these are around 66% of gross domestic product. Within a few years, the US will thus have to increase its relative debt by more than half the half.

Germany is better off in the calculations of the IMF – 535 billion. US $ new liabilities will take the German state to forcend the consequences of the crisis. These are around 14% of gross domestic product and thus significantly less than the average of 27%, forecasting the IMF for the 12 large states of the OECD.

But the estimates of the IMF belong to the conservative. The former IMF chief locomotive and Harvard Professor Kenneth Rogoff has created a study together with the Carmen Reinhart’s Economin, in which they analyze the impact of past bank crises on the sovereign debt of the affected economies. On average, the debt of the states concerned rose 86% in the three years after the start of the crisis. For the current crisis, the ocons predict a new debt of 40% of gross domestic product – these were around 15 trillion US $ for the 12 large OECD countries.

Who should pay?

Whether there are 10 trillion US $, as the IMF predicts, or 15 trillion US $, the Rogoff and Reinhart for more likely – so much money has to come up somewhere. In the past paid central banks and funds from countries who have been able to record export buchers, to the large lenders for the capital-hungry state sector. However, with the crisis also melt their capital inflows and reserves. The private households also have to be completed by the crisis with a burglary of their capital reserves and can not also apply trillion US $ to acquire government bonds.

If one subsequently ames that government bonds are subject to market laws, a surveillance is forcibly leading to worse conditions for the iers – the interest rate for government bonds had to rise to find at all builders for these papers. This is a problem in multiple terms.

Recession and inflation

If interest rates rise for relatively safe government bonds, interest rates must also increase rise – risk costs, a basic rule of the financial system, which was gladly hidden in the past. It will be even more difficult for companies, and above all more expensive to get to debt. This leads to the fact that less is invested – in the crisis a conceivable bad effect.

Overall, a decoupling of borrowing costs and key interest rates threatens. With the effects of trillionary government bonds, which are in competition to the credit municipalities from the economy, no one can record. If a bank has the opportunity to discourage discount interest at the central bank with capital, it will not give its loans to the free economy if safe government bonds promise more returns.

It mights strange – the banks retry, the state must rescue them at the expense of taxpayers and with the debts that the state must accommodate for this rescue make the banks of magnificent gains; to be almost overlapped that these gains are not used to reduce debt reductions that will burden the taxpayer on generations. The state, in turn, can not prohibit the banks, in this way to make profits, because who – Auber the banks – should buy his government bonds? Paradoxically, however, this leads to the fact that the central banks lose their most important monetary policy instrument.

In order to boost the economy, the central banks can reduce the key interest rate and thus the inclusion of borrowed capital. However, if every private borrower has to compete with trillion on government bonds, the intended effect complete – too that is already to be observed. More importantly, the instrument key interest rate is when it comes to combating a pick-up inflation. However, if the banks have lose their balance sheets with government bonds, the central banks can not increase the key interest rate without further ado, as this was once again brought the banking system to the edge of the ruin.

The mother of all bubbles

If banks buy government bonds, they only set a fraction of their own capital. The high credit status of government bonds allows you to create a high debt lever. Specifically, this is that a bank at a 10: 1 lever ten parts borrowed capital either by the central bank or on the money market and underfind them with a part of equity to buy themselves for the entire total government bonds. If the difference between interest rates for debt capital and interest rates from government bonds is roughly, this is a very lucrative business.

However, the term of government bonds is much more long than the term of the contracts for the borrowed debt. If the central bank now increases the key interest rate, the debt is more expensive and government bonds become less profitable. If the key interest rate exceeds the nominal interest rate of government bonds, then a loss bringer is made from the lucrative business. Since the banks do not find suitable connection financing, you must sell. If the offer exceeds demand, the value for government bonds falls into the basement, which in turn forces other banks to throw their papers on the market.

Such a Fire-Sale ware of catastrophic for the state, whose credit costs then rise to priceless, and also for the banking system. If the mother bursts of all bubbles, this would be the end of the economic system as we know it. However, this can be prevented in the power of central banks – except that they then no longer raise the key interest rates. If the trillions arrive in the real economy and raise inflation, the central banks must then watch helplessly.

The gel printing machine

In order not to increase interest rates for government bonds too much, some central banks – among them also the Fed – took over to buy even government bonds. Thus, they break with an earlier principle of monetary policy, which states that the state can not borrow money himself.

This practice is otherwise known more from banana republics and is punished by the market with increasing inflation rates. There is no reason to ame that this scenario could not occur in the US and elsewhere. When the Fed’s government bonds buys, this is as if the state poses its gel printer in the basement. This money lands without real consideration in the economic cycle and works inflationary.

Almost it seems as to calculate this the state with intent. If inflation increases, government debt will also "inflation". However, the price also pay those who borrow money to the state now.

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