Nostradoofus

Ah, youth. How fondly I remember the endless Monopoly games of summer, in which the winner would loan ever greater sums to the loser, thereby averting bankruptcy and continuing the game.

“You landed on Park Place again? What a shame! And me with hotels there. Don’t worry, I’ll loan you the $1,500, and you just keep right on rolling.”

Evidently the scions of our federal government were similarly raised. Lenders going insolvent? No problem, we’ll loan you more, and cheaper, to keep you going. Borrowers feeling strapped? No problem, we’ll simply tear up your mortgage contract and write a new one where you pay less.

Japan tried this in the 1990s, in case you don’t remember.

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Pundits worry the mortgage collapse may push us into Japan-style deflation. That’s one possibility, but there is a more likely one.

Japan headed into its long deflationary spiral with a mostly balanced federal budget, high trade surplus, immense foreign reserves, immense personal savings, low unemployment, and high educational level. This buys an awful lot of flexibility.

The US teeters on a similar precipice, but with no net underneath: gigantic federal budget deficit, large trade deficit, high personal debt, high corporate debt, net debtor status, and uneven educational level.

The stage is thus set more for Argentina than Japan: banking crisis, hyperinflation, currency collapse. I’m not saying it will happen; only that it’s more likely than the Japan scenario.

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