Europe: High Debt Keeps Deflation Threat Alive

Deflation involves a contraction in money and credit.

And, EWI’s European Financial Forecast has been warning that a developing deflationary trend across the Continent will only grow worse.

For example, the March European Financial Forecast stated:

Early indications of stress confirm that a massive contraction in outstanding debt still looms.

Now, Dr. Frank Boll writes this from Rotselaar, Belgium for The Financial Times (August 20):

Unfortunately, deflation is likely to remain alive. Further increases in global debt since the last crisis of 2007-09 will see to that. Future growth is thereby transferred to today. Government bond markets of top quality are aware of this. They foresee declining growth of nominal gross domestic product. That suggests declining long rates ahead, independently of eventual increases in policy rates.

Also, it may be meaningless to invoke economic theory to make the case for imminent increases in rates, because the world has never witnessed the present levels of global debt.

[Another commentator] separates high debt as the cause of the last crisis from low productivity and demographic change as the causes of low growth thereafter. Yes, the bonus culture has made for less tangible investment and thus for less productivity. But also the fostering of still more debt at all costs has contributed to low productivity, by having upheld a rising share of lossmaking companies, a source of waste as has been argued by the Bank for International Settlements in its two latest annual reports.So, high debt not only caused the last crisis, as it will the next, but it can also explain the current declining trend in growth.

Even so, complacency reigns in Europe’s credit market.Returning to EWI’s European Financial Forecast, the August publication [data through July 27] showed this chart and noted:

With Europe driving toward a major credit collapse, a few roadside attractions have popped up to show just how the eventual crash may catch investors off guard. For one thing, there’s the plummeting cost to insure senior European debt, which paints an astonishing picture of investor complacency. According to the Markit iTraxx Europe Senior Financial Index, the price to insure investment-grade European financials against default fell to only 50 basis points on July 14 — the cheapest level since January 2008. The previous low occurred just ahead of the biggest credit collapse since the Great Depression.

You can learn more about deflation by accessing the FREE eBook, What You Need to Know NOW About Protecting Yourself from Deflation.

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