That was a very wise move–a new marriage forced me into buying in 2004 when I didn’t really want to, and I wish I was cashed up as you are now.

And while I’m suggesting that inflation is ultimately a “cure” to a debt-deflation, I don’t expect it to be engineered by the economic authorities–far from it. They are more likely to try to suppress it.

It could also have deleterious effects in this particular debt crisis, because the globalisation of production in the last three decades has resulted in a large disconnect between production and consumption. Gerard Minack points out that inflation in the USA is now very different when measured against the GNE as opposed to the GDP. So rising prices might not result in rising incomes for those in debt, resulting in a “worst of both worlds” outcome.

As for whether inflation will actually occur and result in so-called stagflation rather than a debt-deflation, were it not for Global Warming and Peak Oil, I would put 100% odds on deflation rather than inflation–in which case your cashed up position would serve you very well.

However, with those two epochal events, inflation could easily result simply from physical cost of production causes–let alone pollution abatement and rising energy costs etc. I really can’t pick which trend–deflation from excessive debt, inflation from climatic change–will dominate.

And as to whether you should head back to the UK? The odds are that their debt bubble is even bigger than Australia’s.

Where is the money going to come from to “bail out the big banks”?

Hint: which institution has the power to create unlimited credit/money out of thin air?

Bank with a large bank: it maximises the political repercussions of anything going too wrong.

Where is the money going to come from to “bail out the big banks”?

There is no obligation for the RBA to bail-out a bank in terms of shareholders funds.

Sure, the RBA has no obligation to bail out banks. So do the Fed- it has no obligation to bail out Bear Stearns- but they did anyway to ’save’ the financial system from break-down.

Bank with a large bank: it maximises the political repercussions of anything going too wrong.

That is where the problem is. Big banks know this and this is hardly encouraging for them to be prudent because they know they are politically too big to fail- back to the moral hazard issue.

What I meant by “non-speculative” is “not used to finance asset price speculation”. Good banking to me is lending to finance investment. This necessarily has a speculative aspect in an uncertain world, but if it takes a punt on productive capacity, new technology or new products, that’s a worthwhile potentially productive form of speculation.

During an interview with Jimmy Rogers, when he was asked about regulations on investment banks, Jimmy Rogers answered,

More regulations? You want Alan Greenspan and Ben Bernanke? These are the guys who got us into this situation. They are supposed to be regulating the banking system for the past 50 years. These are the guys who let it all happen. I don’t want more regulations. Let the market regulate it. If xyz needs to go bankrupt, let them go bankrupt. I promise you, that will send a very straight signal and you will have a lot of self-regulation when these guys start to go bankrupt.

Say the RBA and government makes it clear that there will be absolutely no chance of any bail-out for any banks and financial institutions, do you think that would send a very tough signal to lenders against speculative lending?

I have been researching this and it seems that Bernanke http://online.wsj.com/article/SB113392265577715881.html?mod=mkts_main_featured_stories_hsonce proposed buying the long bond end to drive yields (interest rates) down.

Here’s some more from that WSJ article:
“Over the following months, Fed staffers concluded that targeting long-term interest rates by intervening in the bond market was probably impractical. “Once you’ve made the commitment, how do you get out of it?” says Kenneth Kuttner, then an economist at the Federal Reserve Bank of New York and now at Oberlin College”

If the same applies to Australia then deficit spending could also trigger a bond market collapse leading to higher interest rates.

Thus the success of reinflation dependents on whether buyers of Australian government debt believe that reinflation through deficit spending would lead to economic recovery. If sentiment is negative then things could actually get worse.