Easy Credit in an Age of Oversupply
American investment banker Daniel Alpert argues in his new book* that there are only four solutions to an unsustainable debt problem:
- Strong economic growth can make debt sustainable; but growth in advanced economies will remain anaemic as long as there is a need to deleverage.
- Net debt can be reduced by increasing savings; but Keynes’ paradox of thrift suggests that if consumers and governments simultaneously spend less and save more, the resulting recession and contraction of GDP will simply render the original debt unsustainable again. A macro-economy cannot “save its way out of recession.”
- Unexpected inflation can wipe out the real value of private and public debts and avoid debt deflation. But inflation can also result in substantial collateral damage and, in any case, is nearly impossible to engineer when an economy is in a deflationary liquidity trap, as is the case today.
- If an economy cannot grow, save or inflate itself out of an excessive debt problem, then the only solution remaining is debt restructuring: reduction and/or conversion into equity. This is widely recognized to be true for businesses, but it is just as true for governments, households, and banks and other financial institutions.
*The Age of Oversupply, by Daniel Alpert. Pub. by Portfolio/Penguin.