The recalibration of debt

The sovereign debt crisis in Europe rolls on with seemingly no political will to make the tough decisions required to produce a long term solution, pouring more money into black hole economies to buy time looks like the only plan to keep the Eurozone above water. However, sooner or later these short measures will fail and we will see the Eurozone drowning in a sea of debt of its own making.

But the problem is not just in Europe as the illness has spread into global markets. Virtually all major global economies are struggling now, with China once seen a short time ago as the powerful backstop now seeing a rapid slowdown in growth. BRIC countries are simply not able to support so many economies in deep and long term recession.

The problem is huge as without some or any significant economic growth anywhere in the world how does Europe and then the world get out of the syndrome that has been created? No point in making products if no one will buy!

We have tried to deal with the debt problem in the only logical way by cuts and austerity. However, these measures are proving useless in reducing debts as the lack of growth just means you borrow more. Austerity is in fact a downward spiral solution and totally pointless unless it is aligned to growth measures. We can now see clearly that austerity strategies are also short term, but with the added problem that the environment for long term growth is being eroded.

It’s time for wise men to think of something new and try and shake the world out of its inert economic desert. One idea I have been kicking around for a while and totally out of the box, is to globally recalibrate debt. The idea works like this.

All countries around the world devalue their debt to GDP. In this way the economic factors would be set at a new benchmark level. Confidence would return to investors if the debt issue became globally acceptable. Effectively there is a global rising of the bar and we should not be concerned as much about debt but have more concentration on growth. Debt is only a problem when it has to be repaid, so we globally extend repayment terms by 20 years.

As an economist said to me the problem is the devaluation of pensions and savings but my response was “isn’t that what we are facing anyway”.

The debt syndrome is virtually impossible to deal with by normal means and we have to look at alternatives to austerity very quickly as the decline could be terminal, leading to a new dark age.