Comments on: Some thoughts on government debt during deflation

By: Independent

Independent — Mon, 01 Mar 2010 04:31:58 +0000

Great article! All the talk of hyper-inflation just doesn’t match our current situation. I’m also looking for the yield curve in treasuries to contract. As others commented, a lot of debt needs to be defaulted.

By: PEJ

PEJ — Sun, 28 Feb 2010 14:43:10 +0000

Fantastic post Mike.
My here (Harry S. Dent JR) is using the seasons quite extensively in his speeches and interviews.
If you are interested in hearing more about the seasons, you know where to turn to

By: Mike

Mike — Sun, 28 Feb 2010 03:08:13 +0000

Interesting comments about the war era, but that interest rate trend was well-established before the war and continued afterwards until about ‘49. Also, the fixed-rate period was only for a couple of years and when it was abandonded, rates fell! The rate trend was also reflected in corporate bonds - patriotically, those were no different than stocks, which had a very nice yield.

I absolutely agree, the depression lasted until ‘49-50, and the war only made things worse by destroying Japan and Europe and killing tens of millions. That’s not exactly good economic policy. I also suspect you are right that debt will just be wiped out, quite possibly though war. No telling how nasty things will get this decade.

By: Charles

Charles — Sun, 28 Feb 2010 01:55:32 +0000

“why were short-term rates in the low single digits during the second world war when the US had just abandoned the gold standard, had a debt:GDP ratio of over 100% and inflation was running at 8-12%?”

Consumption was capped by various administrative measures (coupons for gas, food, etc…). So the cash that was earned could not be spent, nor freely invested and ended up in Govt Bonds with negative real interest rate. Investing in war bonds was considered patriotic and consequently only a minority of investors (less patriotic maybe ?) grabbed the opportunities to get real assets such as utilities or militaro-industrial units at cheap prices. This was the time where Keynes built the vast wealth he left when he died. (At the time, he was a “pro bono” adviser to the war economic planning, and IMO was effectively paid with very profitable inside information, a bit like Paulson being paid by his enormous tax-free sale of Goldman Sachs shares)
The other side of the coin was the Treasury Fed accord that allowed for monetization of Federal Govt Debt at low rates.

In real terms, it was seriously deflationary (and even more so in Germany and Japan, where essentially all debts defaulted to zero, as the currencies were worth nothing at the end of the war), and really was what cleaned the bloated balance sheets of the GD. The New Deal, as today’s stimuluses, was not even the start of the solution, but still part of the problem.

The lessons from this episode are two-fold :
- the level of frugality necessary to “clean the rottenness” is higher than even the staunchest proponents of fiscal rectitude can imagine.
- there are not many social mechanisms beyond war that can achieve such a downward change in people expectations. My hope is that perceived limitations on natural resources availability could do the trick (I think that such limitations are real, whether they are real or not is not the issue here, the important thing is that people are convinced !), but I am pessimistic overall.