This is a thought-provoking piece. I have two disagreements:
“Debt is not dealt with very well by economic theory. Debts net out. For every lender there is necessarily a borrower.” This is open to some interpretation. It is true that every borrower requires a lender. However, because of fractional reserve lending, the same lender can lend a given amount of money 10 times, assuming a reserve ratio of 10%. Only 10% of borrowers need to default to wipe out all lending capacity. This doesn’t have an impact on the thesis presented by the author.
“Even if Greece were to run zero deficit, ultimately we are heading to default. We can default now or we can default later. Is that a big deal? Frankly, no. 75% of the debt, probably more, is held externally. … For the debt-deflation spiral to start, you need the debt to be internal.” The author makes a point that a Greek default won’t hurt the average Greek because Greeks have a lot of savings. However, the author also claims that almost all Greek savings are held outside of Greece. When Greece defaults, and bank runs occur in Germany, what odds would you place on a Greek getting his or her money out of the German bank?
There’s a third semi-argument: I disagree that a bailout benefits baby boomers more than bankers, as the gross assets of baby boomers will still dwindle if the bailouts are not ultimately successful at maintaining asset prices for the duration of retirement. Bankers are being paid now. It’s not clear that the author makes this argument, though. There’s no separation of intent vs outcome in the author’s argument.
