Latin america had high return on capital when it tried to peg on the dollar to reduce inflation. Fighting inflation in consumption goods with such measures lead indeed to the result you mention. But if you indeed like inflation as a way to get out of debt it s an entirely different thing.

Brad to me the scenario has not changed from 4 years ago, things have only gone a bit more like I expected with each day passing.

The main problem is still the DEBT/GDP ratio. Since that ratio fluctuates and is now breaking its tops constantly, it needs to go down.
Since growth without a rising debt/GDP ratio now seems completely impossible. The only way for the ratio to fall is through debts being erased faster than the GDP falls, say a debt deflation depression.

THe problem is not the 100 bil, 1 tril or whatever other ridiculously small numbers that have seen. The US reel total debt needs be halved and will be halved if historical long term trends are of any use. That means trillions of debt need to be destroyed.

Wether that is through the political decision of generating inflation by the use of the printing press or by massive write downs, wether the system collapses or not is not really important.
The thing is we just have to look at this debt/GDP ratio and think, wow, this ratio will be halved, how can we manage to do that with the less disruption possible ?

There are limits to which you can avoid recognizing losses. You can play some games with accounting rules, but the scope of which that you can do so is limited by GAAP. Once the borrower stops paying then the borrower stops paying.

HK if wages were leading productivity, debt would not necessarily follow. If the government prints lots of money this could be the monetary cause of a wage lead inflation. Government would not need then to borrow. As for companies they would suffer from the wage raises but if there is inflation, then they would enjoy reselling later with a margin.
In fact the debt bubble has appeared because we ve had simultaneously :
anti labor laws
pro trade laws
a tech boom leading to soaring productivity.
all this leading to wage lagging productivity
deregulation of the finance industry and very lax monetary policy.
this leading to a debt bubble and a asset boom

wage leading productivity would not create a debt bubble in the same way because higher wages would lower profits and therefore asset prices. So what would back the increased lending ?
If you look at the 70’s as a decade of wage leading productivity, you don t see a debt bubble happening back then.

The severances were already in contracts and so for the most part couldn’t be rewritten. Bonuses have been lean this year, but if you cut them too much, people start leaving for other industries, and you have no one left.

There is a stereotype of people in the banking industry as people in country clubs smoking cigars, and getting money for nothing. It’s also rather inaccurate. If the bonuses get cut too much, I put in my resignation and then there won’t be anyone to write the computer programs to babysit the databases.

The division between labor and capital is very different today than in the 19th century, and I think that the new division is between skilled labor and unskilled labor. Since I can program, I have skills and hence bargaining power, and if the bonuses are too low, I leave.

There are parallels with the farmers in Zimbabwe. It bothers me a lot that the gap in wealth between people that have skills and people who don’t is growing. If you can crunch numbers and solve complex mathematical equations, then the world is yours. If you can’t then your career prospects are limited.

The trouble is that the obvious solution which Mugabe tried of “attack the rich” makes that people with skills leave, and then production plummets. OK, you have the revolution, you’ve just cut bonuses, and then rich fat cats that used to run the place are now gone. You are now staring at a blank computer screen. What happens now?

The limits that the fed have on injecting liquidity is that if you inject too much liquidity then inflation spikes up. Also the fed injecting liquidity is going to cause the dollar to fall more against the RMB, but right now the dollar exchange rate isn’t what people worry about.

The point of a bailout should be the keep the system from collapsing. The trouble with bailouts is that if you have to keep doing them over and over, then eventually you just run out of money and the system does collapse.

Also the situation with Wall Street is that some banks weren’t so stupid, some banks were particularly stupid, and if there is a bailout the banks that weren’t so stupid are going to be rather annoyed if the banks that were stupid get more benefits.

guest (previous post) — true, the financial system won’t collapse a la 30s, in part b/c of a government backstop. but outright government takeovers/ writing down the equity of existing investors (including any SWF with associated diplomatic issues) would constitute a “failure” in my book, and I don’t think that can be entirely ruled out.

gloomy — the fed’s term auction facility could be expanded quite significantly. by emerging market standards it is quite small — only about 0.5% of GDP. And for all the talk about the fed accepting bad collateral, it is lending against dollar denominated securities, and it seems to me that em central banks are taking bigger risks by issuing paper against $ and euro collateral ($/ and euro bonds). I am stretching a bit, but the serious point is that the fed could if it opted to still inject a lot more liquidity into the financial system. it could for example triple the size of the term auction facility to $180b and sell an offsetting amount of treasuries into the market to avoid growing its balance sheet. the result is that the fed is holding less robust collateral — and there are more safe assets circulating around for folks to buy.