What happens if the G20 nations really slash debt?

The G20 summit in Toronto called on nations to hack away at government debt, But will they really follow through?

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    President Obama (center) joins with other world leaders including Canadian Prime Minister Stephen Harper (left) and King Abdullah of Saudi Arabia (right) for an official photo during the G20 summit June 27 in Toronto. With them in the middle row are President Jacob Zuma of South Africa, President Dmitry Medvedev of Russia, Prime Minister Meles Zenawi of Ethiopia, and Prime Minister Recep Tayyip Erdogan of Turkey. The G20 called for governments to slash their debt.
    Christophe Ena/AP/File
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Here’s a thought. The G20 meeting ended with a call to reduce deficits. The Obama team, on the other hand, warned that cutting deficits might undermine a very fragile recovery.

There seems to be no understanding of what is really going on. We are in a spell of debt de-leveraging in the private sector. There is no way to make the problem disappear. The only real question is who will bear the losses. We’ve seen what happened in Japan. That’s the alternative that most economists are urging (only they claim that this time the stimulus will work…if we keep at it).

But what if governments really take the path signaled by the G20? What if they cut spending? What then?

Well, then you’d have de-leveraging in the private sector. And de-leveraging in the public sector. At the same time. There would probably be hell to pay for a while. But it would at least cure the real problem rather than just disguising the losses and collectivizing the costs.

But don’t worry, dear reader. There is almost no chance that governments will follow through on their promises to de-leverage. Instead, they will reduce the rate at which they are adding debt. The private sector will continue to de-leverage. Government ‘austerity’ measures will be blamed.

And then? Well…who knows? But that’s probably when the printing presses get turned on…and gold enters the third and final stage of its bull market.

Stay tuned.

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