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William White on World Finance

Video Interview with Grant Williams on “Real Vision” on September 3rd, 2018.

William White is a someone I admire for his clarity, intellectual rigor and modesty. The following is a summary of some excerpts of the above interview.

Since the crises that started in 2007, the Central Banks have eased montery policy in many ways. Now Central Banks are nudging governments to act. At the same time, the fiscal room for menoeuver is really used up, excessively so in the US. What is left to do is the hard things, restructuring, repudiating debt, structural reform.

Low-end corporate debt and some government debt won’t get serviced, not at normal interest rates in any case. Something should be done through orderly insolvencies rather than buying time through Central Bank easing and waiting until it all becomes unstuck.

What has happened in debt markets is that the responsible capital has gotten out and has been replaced by quasi-government (Central Bank) capital. This suppresses interest because the stewarded capital piles into the remaining good credit that doesn’t really need it. This segment now sets the rate. 

In this situation, interest is low and bad debt looks as if good. Monetisation of debt has not yet taken effect even though it’s already done (via a “pledge” and a “subsidy”). 

What should we make of this diagnosis? Does this mean there will be inflation or deflation and what do these terms actually mean (quantity of money, consumer prices, asset prices?) I personally believe that it can go both ways, and can even imagine prices remaining rather stable through a lot of financial turmoil. What is clear however is that once the balance starts tipping in the direction of inflation, there is little to hold it back.

A question that occupies my mind is: how come the monetisation has not become effective yet? The knowledge that it has happened is there but accounting seems not to have written down the claims. Does it really take so much to call the bluff? Or has it already been fully accounted for via the exchange rate channels?

SW/21-SEP-18

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