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Off The Cuff: Why Governments Prefer A Currency Crisis To A Debt Crisis

Nothing's as destructive as cascasding debt defaults
Friday, June 1, 2018, 6:09 PM
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In this week's Off The Cuff podcast, Chris and Wolf Richter discuss:

  • Panic in Europe
    • Italy is threatening to destabilize the EU
  • Central Banks Have Wrecked The Market Mechanisms
    • And tapering will reveal the damage done
  • What's Better? A Debt Crisis Or A Currency Crisis?
    • It seems governments vastly prefer the latter
  • Is Deutche Bank Threatening To Start A Banking Crisis?
    • Maybe. And it would set the world aflame.

With the action happening in Europe this week, from the Italian debt panic, to the new Spain PM, to Deustche Bank's worsening prospects, Wolf Richter comes on the program to make sense of the developments in real-time.

Notably, Wolf explains why the world's central banks will work with their home governments to destroy their currencies rather than start defaulting on their debts. This is path he expects the future to take:

A debt crisis is devastating, and it's devastating selectively. A currency crisis is kind of more democratic. It hits everybody. But a debt crisis, it hits the people that are recipients of government aid the most. And that's the problem in Greece and other countries, they had to go on austerity. Little bitty pensions were cut and things like that happened to save a few pennies here and there. And when it's a currency crisis, everybody gets hit and it spreads across. And I think they understand that Japan is uniquely equipped to deal with a currency crisis because it has this large trade surplus and because it sits on a pile of foreign exchange reserves. So that won't really blow up the Japanese economy where as a debt crisis would completely implode the economy, and it would wreak havoc among the people from pensioners and aid recipients and the healthcare system and everything would just collapse. And they decided that's not going to happen.

So that's how I think we need to look at what's happening in Japan. They made a decision to prevent a debt crisis. and if they get a currency crisis, fine, they'll manage that. Italy doesn't have that option. Italy doesn't have its own currency, and it can't do that, so it can get a debt crisis. And that's what happened to Greece, and that's what happened to other countries. When they get a debt crisis it's really nasty. I hope Italy can avoid this thing, but debt crises are just the worst, absolutely the worst. But if a government needs to do anything, it's avoid a debt crisis.

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