Morgan Stanley: Global default inevitable

August 30, 2010

Arnaud Mares, an executive director in the London office of Morgan Stanley, has written a report projecting the inevitable default on sovereign debt on a global scale. He said:

“Governments will impose a loss on some of their stakeholders. The question is not whether they will renege on their promises, but rather upon which of their promises they will renege and what form this default will take.”

The form it’s most likely to take, according to Mares’ predictions, is a “soft” default, with governments paying back creditors with devalued currencies printed out of nothing through quantitative easing. What that means to the average person is looming hyperinflation.

Mares foresees the aging population in the US as a major pressure on the situation. As people retire or become too infirm to work, government revenues drop and there is greater pressure for increased expenditures for the aged, whom the report refers to as an “influential political [constituency].” Writes Mares:

“The conflict that opposes bondholders to other government stakeholders is more intense than ever, and their interests are no longer sufficiently well-aligned …”

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