What is Killing World Economy
Paul Krugman, a world renowned economic thought leader, has recently commented that the world economy appears to be stumbling and he says it is because of Righteousness.
This is a very serious issue and the challenge before the world leaders. Letus talk about the reason and how it can be fixed up.
The worst news is from Europe, but this time there is also clear slowdown in the emerging markets - and there is even warning sign in United States, despite creation of more jobs .
Why does it keep happening, after all , the events that brought on the Great Recession- the housing bust, the banking crisis- took place a long time ago. Why can not we escape their legacy. A series of policy mistakes are responsible for this situation - austerity when economies need stimulus, paranoia about inflation when the real risks is deflation, and so on.But why do the governments keep making these mistakes year after year. The real answer is an excess of virtue, Righteousness is Killing the world economy.
The fundamental problems :
# In all these years leading up to the Great Recession, there had been an explosion of credit mainly to the private sector.
# Old notions of prudence for both the lenders and borrowers were cast aside ; debt levels that would once had considered deeply unsound became the norm.
Then the music stopped, the money stopped flowing and every one began trying to de-leverage to reduce the level of debt. For each individual this was prudent, but my spending is your income and your spending is my income, so in that case every one tries to pay down debt at the same time, you get depressed economy.
So what is to be done :
Historically, the solution to the high levels of debt often involved in writing off and forgiving much of the debt. If we go back to 1930s, the Great Recession time, FDR helped borrowers refinance with much cheaper mortgages, while the crisis Iceland is outright canceling a significant part of debt households ran up during the bubble years.
More often, debt relief takes place implicitly through financial repression. On one hand the Government policies hold interest rates down, while inflation erodes the real value of debt.
In past few years, very little debt relief has actually taken place. Greek creditors took a significant hair cut but Greece is a small economy And is still hopelessly in debt. In bigger economies, very few creditors have received the break. And far from being inflated away the burden of debt has been aggravated by falling inflation which is running well below the target in USA and near Zero in Europe.
The solution is only righteousness and the debtors receiving so little relief just because the regulators feel that any kind of debt relief would result into rewarding bad behavior.
But what is happening now, which is bad for world economy :
In a recent comprehensive 16th Geneva Report on World Economy " Deleveraging what deleveraging" , it is stated that despite private cutbacks and public austerity, debt levels are rising due to poor economic performance. With the result we are arguably no closer to escaping the debt trap than it was five years back. So the Governments and creditors worldwide should think about righteousness , it holds the hope for Achche Din.
This is a very serious issue and the challenge before the world leaders. Letus talk about the reason and how it can be fixed up.
The worst news is from Europe, but this time there is also clear slowdown in the emerging markets - and there is even warning sign in United States, despite creation of more jobs .
Why does it keep happening, after all , the events that brought on the Great Recession- the housing bust, the banking crisis- took place a long time ago. Why can not we escape their legacy. A series of policy mistakes are responsible for this situation - austerity when economies need stimulus, paranoia about inflation when the real risks is deflation, and so on.But why do the governments keep making these mistakes year after year. The real answer is an excess of virtue, Righteousness is Killing the world economy.
The fundamental problems :
# In all these years leading up to the Great Recession, there had been an explosion of credit mainly to the private sector.
# Old notions of prudence for both the lenders and borrowers were cast aside ; debt levels that would once had considered deeply unsound became the norm.
Then the music stopped, the money stopped flowing and every one began trying to de-leverage to reduce the level of debt. For each individual this was prudent, but my spending is your income and your spending is my income, so in that case every one tries to pay down debt at the same time, you get depressed economy.
So what is to be done :
Historically, the solution to the high levels of debt often involved in writing off and forgiving much of the debt. If we go back to 1930s, the Great Recession time, FDR helped borrowers refinance with much cheaper mortgages, while the crisis Iceland is outright canceling a significant part of debt households ran up during the bubble years.
More often, debt relief takes place implicitly through financial repression. On one hand the Government policies hold interest rates down, while inflation erodes the real value of debt.
In past few years, very little debt relief has actually taken place. Greek creditors took a significant hair cut but Greece is a small economy And is still hopelessly in debt. In bigger economies, very few creditors have received the break. And far from being inflated away the burden of debt has been aggravated by falling inflation which is running well below the target in USA and near Zero in Europe.
The solution is only righteousness and the debtors receiving so little relief just because the regulators feel that any kind of debt relief would result into rewarding bad behavior.
But what is happening now, which is bad for world economy :
In a recent comprehensive 16th Geneva Report on World Economy " Deleveraging what deleveraging" , it is stated that despite private cutbacks and public austerity, debt levels are rising due to poor economic performance. With the result we are arguably no closer to escaping the debt trap than it was five years back. So the Governments and creditors worldwide should think about righteousness , it holds the hope for Achche Din.
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