The Phaserl


Austerity can’t help — we’re heading for mass defaults

by David McWilliams, David McWilliams:

As noted in an excellent column in this paper on Monday by Stephen Kinsella, it is five years since the Irish economy began to concertina under the twin pressures of too much debts and collapsing growth. As we head towards six years, the question most reasonable people want to know is, “when is it all going to end”. Maybe the question should be not when, but “how is this all going to end”.

Using history as our guide and the recent episodes of debt-related boom followed by bust, we can safely say that as night follows day, massive borrowing splurges, huge mortgages and house-price booms lead to a protracted period of massive retrenchment, house price falls and a certain amount of defaults. It is not a matter of if, but when.

If a housing bubble can bust with collapsing prices, so too can a debt bubble with mass default.

For those looking for an end to all this, the default period signals the beginning of the end of the slump because this is the moment of realisation for both debtors and creditors that the world has changed irrevocably and in order to go forward, we can’t go back to the past. Contracts signed then, in good faith, simply can’t be delivered on because the new environment of falling prices and diminished income and wealth simply make this impossible.

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