Monday, October 1, 2012

Hussman Weekly Market Comment: Leap of Faith

Economists know that there are three ways to deleverage an economy: austerity – where debt growth is held below the rate of economic growth; restructuring – where bad debts are written down or renegotiated; and monetization – where money is printed to make lenders whole at broader expense. In this regard, Ray Dalio of Bridgewater has good-naturedly called the recent experience a “beautiful deleveraging” because it has involved some mix of all three. But it is precisely that beauty that has made it so ineffective, as the global economy and the global banking system have hardly deleveraged at all in the wake of the last credit crisis. The insufficiency of restructuring measures and the excessiveness of monetary interventions have combined to create an environment of moral hazard where increasing debt burdens have been tolerated without durable concern. The hard decisions have been put off to the point where the size of the problem is likely to overwhelm the ability of hard decisions to address it without a crisis.