Debt and Demand

While growth in the advanced economies seems to have picked up, it remains weak. A more stable growth model will require less of the "wrong" debt – that is, debt that finances purchases of existing assets, supports consumption without addressing inequality, and arises from unsustainable global imbalances.

LONDON – Former US Treasury Secretary Larry Summers recently caused a stir with his warning of sustained economic stagnation in the advanced economies. But, while many reject his suggestion of a secular trend, the data support him. Yes, economic growth has picked up in the United States and the United Kingdom, while the eurozone economy is no longer contracting and Japan shows some signs of responding to “Abenomics.” But the global recovery remains extremely weak, with most advanced economies still performing at 10-15% below pre-crisis growth trends.

It is not difficult to see why the recovery has been anemic. Excessive private-debt creation before the crisis and subsequent attempts at deleveraging have weakened demand considerably.

While fiscal deficits can help to offset deficient demand, they also result in rising public debt. Leverage has not gone away; it has simply shifted to the public sector – creating a debt overhang that may last for many years, or even decades. Eliminating it will likely require significant debt write-offs or permanent monetization.

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