Debt and the economic slowdown in the West.

With the imminent default of the Greek government, where the debt to GDP ratio is 140% and unsustainable,  this blog returns to the economic difficulties the World is currently experiencing, and their political ramifications. Many states in the developed world, including the United Kingdom, are having their prospects for growth extinguished by the burden of their debt. We have, in short, large economies that have become over indebted. As of the 24th September, the national debt of the United States had reached about $14.8 trillion (see http://www.usdebtclock.org/), with families in the US in debt to the tune of $16 trillion. More worrying for the long term prospects of the United States is its trade deficit to China, currently running at approximately $336 billion.

Many Western powers are in for a hiding to nothing in the coming years. The combination of  liberal capitalism and democracy has turned sour. In order to maintain support for their respective programs -specifically in more left-leaning welfare state Europe - many Governments, until the financial mess, had been in a bidding war for votes using public finances. Unfortunately, given the crisis in the Banking sector and subsequent recession, Governments, highlighted by Greece, Portugal and Ireland,  have found themselves in financial difficulties. The central problem comes down to the fact that in a market economy banks and government are inextricably linked. The banks fund government through bond purchases. In return, Governments keep the coggs of the economy churning by paying interest on their bonds and keeping banks' investment arms in the black and creating money. As a result of the 2008 banking crisis, tax revenues have been falling and spending has been rising. Governments have had to borrow more and more from already financially struggling banks. At the moment, the equilbrium between funds raised through government taxation and borrowing has been dangerously distorted. Government spending simply cannot grow economies fast enough to justify extra borrowing at current extortionate rates, hence the difficulties.

Adding to the difficulties is the dynamic of the Eurozone in a recession. The role of the European Central Bank is to set a single interest rate - and, therefore, run monetary policy - for the entire Eurozone. The economies of the Eurozone, however, are fundamentally different. The countries of Northern Europe - including France and Germany- are generally more fiscally stable and need higher interest rates to combat inflation. Inversely, the countries of Southern Europe - including Greece - are finding it difficult to make ends meet and, therefore, need lower interest rates. Trying to set a single interest rate for the entire Eurozone, therefore, is almost impossible. Without closer fiscal union between the members of the single currency it cannot work. The fiscal union needed to solve the problem, however, is very politically unpopular.

The world economy is not in balance. We have the BRIC countries exporting to developed nations and producing such vast trade surpluses that they are actually destabalising the market system. Wages have become so much higher in developed nations when compared to emerging markets that the developed nations simply cannot compete and export. The emerging markets need developed nations to continue buying their products and, therefore, it is mutually beneficial for all states in the world to find a more stable system of trading where countries do not produce such dramatic surpluses and deficits. Only if developed nations get their finances in order whilst achieving a more balanced trading approach with emerging markets will worldwide growth start again in ernest. With the economic backdrop I have described in these paragraphs, it is no wonder that Greece is now going to be forced into default. The system is clogged with debt and it is causing a global slowdown in the West, with the potential to effect developing nations. In the coming years, it is going to take some daring feats of political willpower to sort out the debt mess and get growth. Borrowing and more debt on its own simply will not work and only perpetuate the economic hardship. Solving the debt difficulties of developed nations is going to take some innovative and very bold political leadership and will inevitable cause much anger to put countries back on the path to prosperity.