Opinion
COULD DEBT FORGIVENESS BE THE INTERIM SOLUTION FOR THE WORLD ’ S ECONOMIC MALAISE ?
By Steve Brice , Chief Investment Strategist , Wealth Management , Standard Chartered
There is a growing perception that monetary policy is losing its power to solve the world ’ s economic problems . This may be misleading . What is probably true is that incremental policy easing is experiencing diminishing – and , possibly , negative - returns . Therefore , central banks – and governments - may need to get even more unconventional to reverse the tide . Japan appears to be closest to the tipping point in this regard , although there are few signs that it is winning the battle .
As the global economy faltered while recuperating from its longest recession since the Great Depression , central banks in the developed world moved from simply lowering interest rates – bringing them all the way down to zero - to issuing forward guidance with promises to keep interest rates low for a long pe riod …. to buying bonds , ultimately reducing rates to negative . The Euro area , Japan and some Scandinavian countries are notable examples .
The problem is the lack of sufficient growth and demand . Although the developed economies have recovered somewhat from the Great Recession , they are still not growing at their precrisis pace . This is not surprising given economic growth in the 40 years prior to the 2008-09 financial crisis was largely financed by debt . The emerging economies bucked this trend for a while , helped by the seemingly unending rise of China . However , in the aftermath of the financial crisis , China ’ s boom also became increasingly debt-financed , with the result that attempts to deleverage have led to much slower growth in China and other emerging markets .
We are all taught as kids that we cannot forever spend beyond our means and that the chickens will ultimately come home to roost . So it is with countries and economies . With global debt levels very high , and rising , the world is likely to experience continued sluggish growth , at best , for years to come .
So how do we deal with this ? In theory , there are several ways in which one can reduce debt financing concerns . 1 ) Cut funding costs 2 ) Pay off debts 3 ) Grow our way out of the debt 4 ) Write the debt off
There are problems with all four options . Let ’ s take the first one - interest rates are already extremely low and it is difficult to cut funding costs much further .
In the second option , if everybody tries to pay off debt it would reduce spending and investment , undermining demand , corporate revenue There is a growing perception that monetary policy is losing its power to solve the world ’ s economic problems . This may be misleading . What is probably true is that incremental policy easing is experiencing diminishing – and , possibly , negative - returns . Therefore , central banks – and governments - may need to get even more unconventional to reverse the tide . Japan appears to be closest to the tipping point in this regard , although there are few signs that it is winning the battle .
As the global economy faltered while recuperating from its longest recession since the Great Depression , central banks in the developed world moved from simply lowering interest rates – bringing them all the way down to zero - to issuing forward guidance with promises to keep interest rates low for a long peand economic growth . This can lead to a negative spiral , especially if it incurs deflation ( or falling prices ) which increases the debt burden of borrowers in inflation-adjusted terms .
The third route – through faster growth - is clearly the optimal outcome . Here , it is nominal growth that matters ( real growth plus inflation ). However , the high debt levels make this outcome difficult to achieve . As stated above , despite extraordi-
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