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Auerback: The more you deflate, the bigger the debt problem will get

Marshall Auerback was on Fox Business talking about the European sovereign debt crisis. He said he is very concerned not just about the national solvency problem in the euro zone but also about the debt deflationary policy remedies now being implemented across the whole of the euro zone. He notes grimly, “the more you deflate these economies, the bigger the public debt problem is going to become.”

The deflationary impact of fiscal tightening will only begin to hit the United States in a major way beginning in 2012.

Video below


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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

9 Comments

  1. Oldrich says:

    I have found these 2 interesting and interrelated articles concerning Spain and its banks. 

    According to Bank of Santander there is a risk that only 4 major banks in Spain could survive.

    1) http://www.eleconomista.es/banca-finanzas/noticias/3540480/11/11/Camino-de-un-nuevo-ajuste-financiero-en-Espana-solo-sobreviraran-cuatro-grandes-bancos.html

    2) Interview with the CIO of JP Morgan private banking europe who contends that Germany wants to save the Euro because otherwise it would face losses equivalent to 20 % of GDP. Spain should ask the EU for between 50 -100 billion Euro for recapitalization of banks. 

    http://www.cincodias.com/articulo/d/bce-actuara-prima-francia-llegue-350-puntos/20111119cdscdicnd_2/

  2. Jo says:

    It’s a shame that Auerback still doesn’t realise that you can’t prevent deflation.

    …or maybe he’s just shilling for Keynes.

    • David Lazarus says:

      Deflation is going to happen. The problem is do you deal with it rapidly as in the thirties or drag it out like in Japan in the 90′s. The problem is that with the state of the US safety net the options are not good. The fact that there is a huge debt overhang in the economy will slow it down until it is cleared. As Marshall has stated the current government deficit is allowing the private sector to pay down its debt. Though not fast enough in the house hold sector. Businesses are managing to cut debts but the labour market is so weak that most individuals are struggling to pay down debt. That will become a problem in the near future as when the economy recovers the gains will be sucked up ever more vigorously by the banks. The economy will suffer long term because of that.

    • Jay H. Mani says:

      I agree. 
      I like Auerback a lot. He is an extremely bright individual, but anyone who thinks they can stop deflation with increased government intervention is not living in reality. Debts either have to be written off, paid down, or inflated away. The later is current policy. 

      • Anonymous says:

        I think that we will get the worst of both. We will still have asset deflation, and inflation. Eventually this will mean that assets still fall as before but the currency will now have the problem of currency revulsion on top.   

        • Jay H. Mani says:

          The problem here is that deflation is the likely outcome. Inflation and higher levels of it is purely not a monetary phenomenon. There is far too much debt in the world today and the only way to get out of this mess is default and restructuring. Eventually the Euro will die and USD will get stronger.

          • wh10 says:

            I don’t understand why you all necessary see detrimentally above average price rises (how I define inflation).  Auerback doesn’t indicate he foresees this simply because the economy is way below full output, and he doesn’t see inflation a direct result of money supply measures but instead of spending relative to output.

          • Guest says:

            Well…JGB Yields Would Need To Move Back To 1.30% where he originally spoke anbout this position. They are currently ar 1.08%. This is no different then toating a stock at 1.30 and have it drop all the way to 84 cents then call your self a genious if it moves back to 1.08

  3. Jo says:

    It’s a shame that Auerback still doesn’t realise that you can’t prevent deflation.

    …or maybe he’s just shilling for Keynes.

    • Anonymous says:

      Deflation is going to happen. The problem is do you deal with it rapidly as in the thirties or drag it out like in Japan in the 90′s. The problem is that with the state of the US safety net the options are not good. The fact that there is a huge debt overhang in the economy will slow it down until it is cleared. As Marshall has stated the current government deficit is allowing the private sector to pay down its debt. Though not fast enough in the house hold sector. Businesses are managing to cut debts but the labour market is so weak that most individuals are struggling to pay down debt. That will become a problem in the near future as when the economy recovers the gains will be sucked up ever more vigorously by the banks. The economy will suffer long term because of that.

    • Jay H. Mani says:

      I agree. 
      I like Auerback a lot. He is an extremely bright individual, but anyone who thinks they can stop deflation with increased government intervention is not living in reality. Debts either have to be written off, paid down, or inflated away. The later is current policy. 

      • Anonymous says:

        I think that we will get the worst of both. We will still have asset deflation, and inflation. Eventually this will mean that assets still fall as before but the currency will now have the problem of currency revulsion on top.   

        • Jay H. Mani says:

          The problem here is that deflation is the likely outcome. Inflation and higher levels of it is purely not a monetary phenomenon. There is far too much debt in the world today and the only way to get out of this mess is default and restructuring. Eventually the Euro will die and USD will get stronger.

          • wh10 says:

            I don’t understand why you all necessary see detrimentally above average price rises (how I define inflation).  Auerback doesn’t indicate he foresees this simply because the economy is way below full output, and he doesn’t see inflation a direct result of money supply measures but instead of spending relative to output.

          • Guest says:

            Well…JGB Yields Would Need To Move Back To 1.30% where he originally spoke anbout this position. They are currently ar 1.08%. This is no different then toating a stock at 1.30 and have it drop all the way to 84 cents then call your self a genious if it moves back to 1.08