What if all goes wrong in Europe? How bad could it actually be? What’s the worst case scenario for the world economy, and do the twin debt crisis in the US and Europe have the potential to drag down China too?
We are on the verge of debt deflation taking hold via a housing double dip and negative equity. Commodity prices (reflected in food, energy and clothing), plus health care and education costs are rising in a regressive way. Companies have combated this by trying to prevent cost pressures from feeding through by keeping headcount down. This has effectively meant that lower income households get the bad side of both commodity price inflation and debt/income deflation.
The vaunted concept of the money multiplier is merely an ex post accounting factor. The logic of why it is not an ex ante factor is amazingly simple.