Inflation vs Debt Forgiveness

As the rich get richer and the poor become poorer, the global middle class, the ballast of an economy, is fading away rapidly!  Will history repeat itself with another global recession? …or will technological equalizers instigate radically different outcomes similar to the Arab Spring? 

2012 will launch under an uncertain backdrop due to a slew of upcoming political elections in major economies. The newly elected officials will inherit an inefficient global economic system burdened with debt that under the best of circumstances may take several decades to repay. Without the presence of a strong middle class, however, the lack of sufficient funds to service global debt load could threaten public sector payrolls and hence the key supply of political votes. As long as the global economic model remains unchanged, an era of international debt forgiveness will precede any major political changes.  Just as home-owners have walked away from mortgages greater than the value of their homes, so to will indebted countries force their creditors to take significant write-downs.  Eventually the global economic system will collapse under its own weight as lenders and shareholders to affected banks miss their interest payments too.

This dire scenario, likely or not, should help readers see through the clutter of political rhetoric and appreciate the incredible importance of supporting a healthy middle class.  For example, a strong middle class offers the tax collection engine to pay down debts by training and employing a workforce that sustains local and export-based industries. It also keeps the wealthy in check by allowing new entrants and keep the poor in line to become law abiding citizens and contributors.

What chance does the middle class have in today’s political climate?  Consider North Korea where a family’s militant rule has mesmerized the population into a fanatical frenzy unaffected by the usual stimulants of change such as starvation or border profits.  …or Venezuela where political loyalties are exchanged for basic needs.  …or China where a centralized ruling party dictates price levels and exchange rates.  …or Russia where cronyism and mafias undermine social freedom.  …or Spain where the unemployment rate of young professionals is rampant.  …or Pakistan where the military and the ruling party are at a ‘Mexican Standoff’.  …or Iraq where the US military exodus may soon result in a civil war.  …or Greece where the ECB plans to establish local branches to attract local funds, hence eroding any chance of a middle class comeback any time soon.

Under these real world circumstances, any middle class would have a tough time thriving.  What then can be done, when the cost of servicing debt undermines innovation, growth, and progress? How likely will a wired middle class hold out for two decades longer to make good on their debts?  No doubt something will give in, sooner than later. Will it be inflation, debt forgiveness, or both?

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