If global leaders fail to finger debt, how can we save the world?
It is mind-boggling that the leaders currently convened in Davos for the World Economic Forum can discuss a myriad of economic elements still lingering on a precipice, but every single one fails to name debt as the number one problem of the global economy.
Debt is being discussed all the time at this august meeting. It is looked at from all angles, dissected, proportioned, pushed, pulled, restructured, and every imaginable solution offered for how to handle the debt, but not a single presenter bluntly said, there is too much debt and it is killing the world economy.
The annual meeting of the World Economic Forum (WEF) started on Wednesday in Davos, Switzerland. This is the meeting that has been marred by serious protests in preceding years but this week the low media profile of the first two days was very obvious. One really had to dig to find information on the WEF sessions, other than the official press releases sent out in a flood. Even the BBC that usually gives this meeting wide exposure, only ran a single blurp with four items.
But it is not the attention the WEF receives that interests me, it is the actual opinions expressed by the various world leaders and the numerous experts. And this is where I picked up that, in my view, the core problem namely debt, is discussed and analysed in all its multiple facets, but not a single opinion on how to reduce it.
Immediately after the 2008 financial crisis, cyberspace was flooded with opinion how to solve the crisis, and there were many experts proposing all sorts of temporary solutions. One of my favourites came from an analyst in America stating “you can’t borrow your way out of debt.” In the ensuing years since, this obvious truth has been widely discredited and even in academic circles, usually more prone to honest analyses, sentiment has shifted to believing “you can actually borrow your way out of your current indebtedness, as long as you lay it on the necks of the next three generations.”
When the leaders at Davos talk about “reshaping the world”, I become an instant skeptic if I do not hear solutions for the reduction of debt, not as a percentage of some or other macro-economic measure, but in absolute, nominal terms. Nobody at Davos this week, sees the reduction of debt as the long-term solution to all the economic ails.
Europe and European conditions are discussed in great detail. Labour market inflexibility is named by several experts, but not a word on debt. The cost of debt and the sustainability of debt, and eventually the growth of debt, all feature on the radar rather prominently. Even the willingness of bond investors to stay in debt markets in southern Europe, is discussed, and the impact of their exit is named repeatedly, but bringing down that debt does not feature.
I gather that the latest wisdom on reshaping the world has departed far from the common sense observation that pre-crisis debt, current debt, growing debt, and the debt overhang, will still kill the world slowly, as long as it is bearable, not too painful, and does not happen on the watch of the current set of political leaders, in whichever country you chose as an example.
The focus is all on growth and on sovereign debt, but it seems to me all the experts forget that there will be no significant growth as long as debt on household balance sheets remain a pressing issue. Ultimately, it looks as if it is forgotten conveniently that in a consumer society and economy, you can stimulate as much as you want, and you can inflate banks’ balance sheets as much as you want, but as long as the consumer chooses not to come to the party, growth will remain a mirage.
I don’t think it helps the world economy one bit, least of all us in Africa, to state that 1% GDP growth must be seen as the new norm for developed economies. That is stating the obvious, but it avoids addressing the core issue why economic growth is so low, and will remain so for another decade. I do not need a panel of experts to tell me the world economy is trapped in a low-growth environment, and it can be cladded in any form of academic or quasi-academic economese, the basic fact remains: the debt overhang is dragging down the world economy.
Another obvious observation that borders on the imbecilic, was the statement that Europe must create jobs. Now that is a topic we in Africa know everything about, but the Davos crowd does not seem to get it. As long as consumers are so indebted that they can not even stretch their necks, the economy will not grow and as long as it does not grow, the jobs will not magically appear from some daft policy.