Ecocalypse – possible post debt world scenarios

for the past 25 years, since Japan entered its long tunnel of stagflation with low interest rates, several other advanced nations as well as other economies both mid developed and emerging markets gradually followed its footsteps. Japan as the second most developed economy (even till recently) has been able to successfully survive over two decades of most searing and pioneering experience in tight rope walking on the knife edge with two disaster scenarios: between shrinking precipitously or absorbing stimulus at low rates of interest  which can fuel inflation.  

The twin specters of deflation and mounting debt are haunting Japan, Europe and a swathe of other countries in other continents. US though not in deflation is being plagued by near zero interest rates and unsustainable debt. Overall the debt plague has made killing inroads into practically all economies including China, India among major ones. Only a handful could be outside its baleful influence.

Argentina which had defaulted on its international debt in 2002, got a respite when IMF, few PE companies, etc picked up the debt. Next when the country could not service the debt, restructuring of debt was done. Then bitter court cases were fought out on whether the old loans could be repaid by new loans. Here also the judge ruled that only certain debt could be retired first, now the situation has become complex with couple of PE firms wanting to exit in London which appears to be outside the jurisdiction of the Judge’s ruling.

Now in view of the world wide phenomenon of debt, it would be really worthwhile knowing how much debt can economies absorb at near zero rates of interest.  Next question would be how much lower the rates of interest can go? Is it new era of micro interest rates? Recently even Germany issued 5 year debt at –ve rate of interest.   

Next, it would be interesting if we could forecast what could happen after a prolonged period of the above. Some of the options could be:

1. Period of sub zero rates of interest which would lead to shrinking economies, currency crises, devaluations, imploding loans, bank runs, flight of deposits and capital, fall in asset prices…
2. When then terms of repayment of the loans appear too onerous, there would be move for ever greening the loans. Repayment period of loans can be extended; there could moratoriums on the repayment of loans if the creditors agree. Thereafter writing off the loans. The implications of this will depend upon whether the loans are external or internal? There will always a heavy price to pay. The creditors will set tough conditions. If there is a write off, how will it accounted for.  Who bears burden of final writing off or ultimate capitalizing the loss. What will the implications be on the various interrelated economic parameters like deflation, stock markets, currency decline, fall in interest rates, flight of capital, sale off government/ public sector companies, reduce costs and austerity measures.
3. The range of variables cover in such a crises external and domestic debt, trade, GDP, inflation, exchange rates, interest rates, banking crises and commodity prices.
4. In the future there could be paradigm shifts in solutions for overcoming debt. Some of the out of the box solutions could be:
1. Rich nations buying poor debt laden nations;
2. War to take over the debt ridden country;
3. Mortgage and sale of large tracts of land, islands, monuments, historical sites, provinces, mineral mines, crude wells, factories to countries, rich individuals, private equity forms, corporates, financial sector, etc both domestic and international.
4. Introduce a barter system strategically so the further debt can be avoided. A mechanism need to be worked around.
5. Debt ridden countries may be forced to down size or right size and then may be adopt a steady state for their economies in order to escape the debt trap, though this may not be most palatable to the citizens. The recent protests in Greece and Spain show that this is not easy to implement.
6. Compartmentalization of past debt in different buckets with differential treatment for each. Maybe securitisation..a la Wall Street style...mother of all debt....
7. Pushing part of the debt to future generations to repay. This could one of the options of f above.
8. Usher in Ecocalypse – the death of money.
5. Sometimes these solutions cannot be taken in isolation. The people at the grassroots after years of profligate living would be extremely adverse to adopt austere lives. People all over the world would react similarly.
6. Hence the debt problem is indeed a time bomb ticking away into the future, forever being postponed. Strategic innovative accounting principles need to be evolved to reduce the pain now and in as fair a way push it to the future.  As Keynes said in the long run we are all dead.