^^^ the bolded part at the end of page 4 and beginning of page 5 is important.
more interesting parts:
Right now China is in perhaps the greatest bubble seen to date. That bubble is in its final
stages—and it is built less on extreme debt ratios than by government and private overinvestment in
infrastructures, real estate, and industrial capacity.
Countries like India and China are likely to continue to raise interest rates and capital requirements
at banks short term to fight such inflationary trends. Meanwhile, governments in developed nations
are stimulating against deflationary trends. This is the paradox that is likely to come to a head in 2011-
2012.
China’s bubble is the last to peak. The slowing that began in Europe, with its sovereign debt crisis and
fiscal austerity from late April 2010 forward, and the slowing ahead in the U.S., from its mortgage and
debt crisis likely to hit from late 2011 forward, will trigger the bursting of the bubble in China and the
emerging countries. These countries, along with Canada, Australia, and New Zealand are feeding an
unprecedented infrastructure boom that makes the growth in Dubai look like child’s play. Rising
inflation is already challenging the bubble and may force the peak in growth even earlier. The emerging
world increasingly relies on exports to China, as growth in the developed world has slowed since late
2007. A slowing in China will reverberate around the emerging world, which is supplying them with
materials and energy to support its building bubble.
The private credit bubble does not even compare with the federal entitlement bubble, which saw its
greatest increase in Medicare drug benefits under George W. Bush in 2003. When the government
promises benefits it has not funded through savings and investments out of tax revenues, that action
creates effective debts or obligations for the future. That is why the U.S. government projects deficits
of $1 trillion plus for decades to come, even in the rosiest scenarios for economic growth and
government revenues—which have no chance of occurring under our scenario for a flat-to-declining
economy in the next decade, due to slowing demographic trends and deleveraging of debt. Therefore,
even the most conservative $46 trillion in unfunded liabilities admitted by the U.S. Treasury in 2009
is way too conservative.
The $42 trillion in private debt ultimately needs to be written down by about $20 trillion to fall back in line
with the pre-bubble levels of 2000, especially given that real estate and business values are down by as much
as 55% to 70%. The logic is that we simply erase the bubble levels in asset prices and debt levels before we
move on.
Keynesian economics was probably the worst innovation in economic history! Sometimes you have to
make mistakes to realize the truth. Keynes’s theory created both the illusion that you can grow forever
without down cycles (which has never worked out in reality, as such stimulus has only created greater volatility in longer-term cycles) and, more importantly, the imbalance wherein the economy would no
longer go through its natural cycle of slowdown, replenishing, and detox, just as the human body does
every night. That situation creates even greater imbalances in productive capacity and debt, which
ultimately forces an even bigger deflationary crisis, much as happened in the 1930s and as will happen
in the coming decade!
