Default Therapy

Why not let an insolvent debtor default and invite capitalism to do its work?

That’s the process an Austro-Hungarian economist by the name of Joseph Schumpeter used to call “creative destruction”…and it has worked pretty well over the years, believe it or not…….

Consider the divergent fates of two countries that came face-to-face with a financial crisis in 1990. One of these countries is still merely muddling along…20 years later! The other country is flourishing.

That’s because one of these countries, Japan, responded to its crisis by coddling its crippled corporations and by throwing monumental sums of taxpayer dollars at failing financial institutions. The other country, Brazil, responded to its crisis with relatively savage measures. It defaulted on its debts, devalued its currency (more than once) and did not stand in the way of corporate failure. Brazil’s responses were far from perfect, but they were much less imperfect than were Japan’s……

Too bad for Japan. Its economy has muddled along for two decades, while its stock market has produced a loss of 2% per year across that entire 20-year timeframe. By contrast, the Brazilian economy and stock market have both boomed during the last two decades, despite some very serious bumps along the way.

via Default Therapy.

One Reply to “Default Therapy”

  1. There are a lot of people suggesting that thje Greek debt crisis should be handed the way of the Argentinain debt crsis. And that the results of their default have been much gentler on the population.

    The problem seems to be when governments work too hard to protect the ‘rights’ of investors, either overseas (in the case Japan and Greece) or locally in the case of the GFC. Unless they are allowed to default on their debt, the population of Greece can look forward to years of misery trying to protect what is basically just a poor investment by their creditors.

    It seems a simple choice for the Greek population to make if they are allowed to decide. The fact that there hasn’t been an uprising over the plans to pay the money back shows something about the way people will try and do the right thing or perhaps something scary about the way public opinion can be manipulated.

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