How to Save the Global Economy: Write Off the World’s Debt

The best way to restart global growth is with debt. We need both more and less of it. Bear with me here. We need less debt now: Developed-world debt is holding the recovery back. Individuals are cutting what they owe as fast as they can, especially in the United States and Europe, and governments aren’t ...

Erik Abel/Bloomberg via Getty Images
Erik Abel/Bloomberg via Getty Images
Erik Abel/Bloomberg via Getty Images

The best way to restart global growth is with debt. We need both more and less of it. Bear with me here.

We need less debt now: Developed-world debt is holding the recovery back. Individuals are cutting what they owe as fast as they can, especially in the United States and Europe, and governments aren't picking up the difference. After briefly loading up on debt -- in part because of stimulus, but now mostly because of bailing out broken banking systems -- they now have the deleveraging bug, too.

Cash diverted to paying off bills must come from somewhere, however, and that somewhere is consumption. With the United States and Europe together accounting for half of global GDP and with consumption making up 70 percent of U.S. GDP, we have a math problem: No matter what innovations are introduced, no matter what entrepreneurial ideas are tried, there aren't enough customers for the United States to export its way out of the self-imposed austerity that comes with deleveraging. Consumer demand is the most precious product in economic life, and the United States, normally demand's biggest provider, is rationing its supply. A deleveraging U.S. consumer is not reconcilable with a speedy global economic recovery.

The best way to restart global growth is with debt. We need both more and less of it. Bear with me here.

We need less debt now: Developed-world debt is holding the recovery back. Individuals are cutting what they owe as fast as they can, especially in the United States and Europe, and governments aren’t picking up the difference. After briefly loading up on debt — in part because of stimulus, but now mostly because of bailing out broken banking systems — they now have the deleveraging bug, too.

Cash diverted to paying off bills must come from somewhere, however, and that somewhere is consumption. With the United States and Europe together accounting for half of global GDP and with consumption making up 70 percent of U.S. GDP, we have a math problem: No matter what innovations are introduced, no matter what entrepreneurial ideas are tried, there aren’t enough customers for the United States to export its way out of the self-imposed austerity that comes with deleveraging. Consumer demand is the most precious product in economic life, and the United States, normally demand’s biggest provider, is rationing its supply. A deleveraging U.S. consumer is not reconcilable with a speedy global economic recovery.

So, here we are. We need to get deleveraging done quickly if we are to restart the global economy. We can’t wait until China becomes a country of consumers, and we definitely can’t wait until the developed world works through the massive overleveraging of its real estate, the root cause of the current malaise. We need a debt jubilee: an organized and massive deleveraging in the developed world. Call it First World debt relief, if you will. (Paging Bob Geldof.)

The original debt jubilee idea comes from the Old Testament’s book of Leviticus, which (by some interpretations) decrees that every 50 years we should forgive all debts. It is doubtful that such festivals of debt deliverance ever happened regularly. After all, who would lend to anyone in Year 49, knowing full well that in Year 50 you would have your debt repudiated? But the idea is the thing: the notion that societies steadily accumulate the dead weight of debt until it becomes too much for the economy to bear, at which point it must be sloughed off.

Sometimes that happens slowly, as it did during the near decade of the Great Depression, but it can happen quickly, too. The history of debt deleveragings tells us that doing it slowly is painful and prone to causing multiple recessions. The cure is a debt jubilee: a sharp and systematic reduction in overall debt, at all levels, from countries to individuals. Call it mass default if you must, but it will be organized default that runs along predictable tracks.

A jubilee alone won’t restart growth — for that we will eventually require, among other things, more consumer debt. Capitalism needs debt and always will, and the lesson of bankruptcy is that lenders come back quickly afterward. But first we need a fresh start, and we need it now.

<p> Paul Kedrosky is senior fellow at the Kauffman Foundation. </p>

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