Guess which of the three roads political leaders in heavily indebted countries will take? That includes large parts of Europe, the US and UK;

1. Deflate – introduce savage cutbacks in spending and increase taxes hoping to gouge out the cash to pay off lenders and shrink spending to the bare minimum to prevent further runaway borrowing. Problem – it’s hugely risky from a political perspective and will lead to riots and stiff resistance from the more bloated part of the economy especially those in previously protected jobs like the public sector. Raising retirement age, cutting pensions and shedding jobs will make you as popular as a weasel in a henhouse. Good for DIY, home-made sandwiches, soup kitchens and the black market.

2. Default – Popular among anarchists, idealists and attention-seeking economists this proposes that a country unilaterally reschedules its debts. That means not paying back the money when its due and imposing write off’s. Problem – You can get locked out of debt markets completely and pay through the nose for any future borrowing because you represent a bad credit risk. Ultimately it leads to steep falls in the economy as huge numbers of public sector workers are laid off in an IMF bail-out but the anarchists love the mayhem. Good for reminiscent granddad Trotskyites, Garda overtime, bored middle class university students and the tee-shirt market.

3. Inflate – A subtle default, this involves stoking inflation by printing money thereby devaluing your paper currency so that when you do repay debt it’s only a fraction of what you borrowed as a percentage of the economy. Problem - Debasement of money runs the risk of creating runaway inflation but it screws lenders slowly over time rather than voters. Good for heavily indebted borrowers, sales of man-bags and politicians faced with either 1 or 2 above.

The road we’re on I’d say is obvious. That’s why I’ve been cautioning readers to prepare for inflation like we haven’t seen for three decades. Get out of variable mortgages, cash, government bonds and paper currencies and into stuff that responds to high inflation, real assets like commodities, precious metals, property and land. Choose only shares in businesses that can outrun inflation.

S&P Says Houses are Undervalued

So Irish house prices are undervalued? That’s according to Standard & Poors the same crowd that told banks worldwide US mortgage portfolios were top grade despite being infected with liar loans. Maybe the nice people at S&P are loading into Irish property themselves? Nah, read the small print. Prices are undervalued based on historical averages. Yeah, a bit like telling a patient in intensive care that if she were the average patient she’d feel better. There’s no chance of any price recovery until the excess on the market is cleared away and that excess is going to get worse as the bank squeeze tightens. So expect another dip in prices and little cause to celebrate until we’re a lot closer to the centenary of The Rising.

Small Business Wipe Out

Voiceless in the clamour for media attention, Ireland’s small business army continue to get it in the neck as banks, now flush with fresh capital, turn the knot on upside down investment properties. These are the new poor, emerging ruined after a lifetime in business, their retirement plans in tatters. Heaping indignity on distress, the bust self-employed have a long wait to get social welfare assistance. So next time you hear a well paid public sector worker whinge about pay cuts remind them what real carnage looks like - getting up in the morning to tell your wife and kids that the family is owned by the banks, that not only has the small business gone under but so too are all their assets.