Many developed nations have borrowed and spent beyond their ability to repay their debt. Central banks around the world are faced with complex decisions on the best policies to improve liquidity. When economists weigh in with solutions, they fall into one of two groups ? those who want to borrow more and put more money into the system and those who say to cut spending severely with no additional debt. Roger Nightingale, economist and strategist at RND Associates, points out that with previous credit booms, like that in Japan in the 1980s, the result was sustained recession. So whether it is “borrow and spend” or “severely cut spending to cut the debt” there will be the same result ? a sustained severe recession or, as some would call it, a New Great Depression.
Catherine Boyle, a staff writer at CNBC.com, recently reported on an interview broadcast on CNBC’s “Squawk Box Europe” with author Richard Duncan who wrote a book called The New Depression. Duncan describes the problem vexing the world today resulting from so much cheap credit. Greece has been the most severely threatened while France, Spain, Great Britain and the United States are feeling the pain. So far efforts have been focused on throwing large amounts of money into the system, relying on the theories of Milton Friedman, Nobel Prize winning economist, who says monetary policy should constantly expand. The responsible people take the cautious route to get a handle on their debt but the “bad people” take advantage of the system. Duncan proposes that governments take advantage of the low interest rates to borrow “massive” amounts of money to invest in new technologies like renewable energy and genetic engineering. He says that “even if it is wasted, at least we could enjoy this civilization for another ten years before it collapses.” There is also the chance that it could pay off.
Running adamantly counter to that view is the belief that governments need to focus on cutting debt. Rather than grease the economic machine with more money, take the austerity route. The response in Greece to this proposal has been riots in the street and in France, President Sarkozy lost the recent election to Francois Hollande. Too many lives have been planned around the current system for many to agree on what to sacrifice in the name of national debt.
Either way, the worst is probably not over for the economy. With consumer confidence low and joblessness still high, we all need to stay informed.
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.