The Debt Delemma

These are definitely strange times we live in. On the one hand, everyone realizes that there is way too much debt overhang in the global financial system (both public and private). We hear that discussed all the time. At the same time we are told that despite the risks from the debt, things are going OK and to expect 3% or better GDP. This article appearing on the Project Syndicate properly notes that the debt is a big problem. 

This very same web site ran an article the other day (which we covered here on the blog) that suggested that we should just quit worrying about the debt because near zero interest rates are here to stay for a long time making the debt sustainable far into the future. I certainly don't know what is going to happen, but the debt is out there and continues to grow. It eventually has to be dealt with one way or another even if rates stay very low.  All we can do is continue to follow events.

Below are some quotes from this new article, "The Debt Delemma."

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"Greece’s divisive negotiations with the EU have placed debt back at the center of debates about economic growth and stability. But Greece is not the only country struggling to repay its existing debt, much less dampen borrowing. Its fraught negotiations with its creditors should spur other countries to take action to address their own debt overhangs.

Since the global financial crisis erupted in 2008, the world’s debt has risen by $57 trillion, exceeding GDP growth. Government debt has increased by $25 trillion, with the advanced economies accounting for $19 trillion – a direct result of severe recession, fiscal-stimulus programs, and bank bailouts. While American households have reduced their debt considerably (mainly through mortgage defaults), household debt in many other countries has continued to grow rapidly. In all major economies, the debt-to-GDP ratio (including both public and private debt) is higher today than it was in 2007."

. . . . .

"To be sure, debt itself is not bad. But excessive reliance on debt creates the risk of financial crises, which undermine growth. Given this, the world needs to find both less credit-intensive routes to growth and ways to eliminate existing debt burdens."

. . . . 

"The global economic crisis laid bare the challenge of debt reduction – and the risks that excessive indebtedness raises. Yet the crisis also intensified government and household dependence on leverage, causing debt levels to continue to rise – a trend that, left unchecked, will lead to more crises in the future."

Click here to read the full article