A few months ago, I wrote about a prophetic book "Debt and Delusion" by Peter Warburton [my earlier posting here]in the 90s that predicted the high debt levels in Western countries will eventually lead to govts printing money as a last resort to delay the day of reckoning but the attempt to shore up the system will prove futile.
In a game of chess, when the end game is reached, there are few pieces left on the chessboard. The remaining moves and possibilities are limited and expert players can calculate how the game will end if both sides play it optimally. Sometimes one side has a disadvantage that cannot be overcome no matter how well the moves are played...all the player can do is delay the inevitable end and hope for an outside chance that his opponent makes a mistake.
We may be seeing the economic end game of the past few decades being played out in the coming months. Govts have exhausted almost their options...in the US the only game left is QE2 (Quantitative Easing 2...aka printing money round 2). Earlier in the crisis, western govts tried to spend their way out incurring massive deficits. Many have given up on this and implemented painful austerity programmes - some are forced e.g. Greece, Spain and Ireland while others like the UK govt recognised that they are better off taking the pain early than being forced to do it later - the coalition govt there incurred the wrath of the students tripling university school fees and have announced they will cut those who refuse job offers from welfare. There was an interesting article in the Straits Times a week ago "The Lessons from the Great Depression" by Harold James[Link] that explained that the fiscal tightening during the Great Depression was brought about by events in the capital markets - a sort of forced move rather than mistakes on the part of govt as it is often seen by Keynesian economists. The lesson from the Great Depression is it will get ugly once there is widespread revulsion against all government debt in particular US govt debt - interest rates will rise and overrun all the positive soothing effects of QE2 ....In Asia and emerging markets, all the bubbles (stock & housing) will quickly deflate as speculative money flows out as quickly as they came in the past few months.