Mohamed El-Erian, the Chief Executive Officer of PIMCO, writes this morning that “It is now commonly accepted that Greece’s predicament is due to two inter-related problems: the economy is unable to grow, and the debt burden is enormous. (Link)
Yet, El-Erian states, neither of these issues are being addressed in the discussions going on concerning the resolution of the debt crisis in Greece.
The reasons for this are complicated although they very often boil down to the priority to handle short-run problems immediately and postpone the long-run problems to another day. Of course, the famous quote of John Maynard Keynes comes to mind: “In the long-run we are all dead!”
A good listing of the complicated entanglement of the politics of the Eurozone is present in the Wall Street Journal article “Europe’s Greek Stress Test” by John Cochrane and Anil Kashyap. (Link)
The authors list four key facts:
- “First, the Greek government has borrowed more than it can plausibly afford to pay and certainly more than it will choose to pay. It now owes more than one and a half years’ economic output.”
- “Second, European banks are holding the bag.”
- “Third, the European Central Bank (ECB) is now involved as well.
- “Fourth, in the end this is all about Ireland, Portugal, Spain and Italy.”
In other words, by ignoring the basic underlying causes of the problem, the sickness has spread and now envelopes nor only Europe…but the world.
In other words, the old economic paradigm is dead, and the political leaders of the western world have only made things worse by trying to keep the old paradigm alive.
As a consequence, the options available to these leaders are shrinking and those options that are left are becoming less and less desirable.
And, even if the bailouts continue and postpone the resolution of the crisis until another day, the two basic issues mentioned by El-Erian are not being addressed. These are the issues pertaining to the reasons for slow economic growth and the reduction of the massive debt levels that are outstanding.
The solution…increase economic growth and lower debt levels.
The problem…over the past fifty years or so the political leaders of most western nations worked with an economic paradigm that resulted in an increase in debt levels to increase economic growth. That is, credit inflation, whether in the economy as a whole, or in a particular sector like housing, would buy politicians additional votes by keeping economic growth high and unemployment low.
“The solution” reverses almost 100 years of the economic and political thought of western intellectuals. It also contradicts the perception of many voters in western countries.
Keeping a lid on debt exposure is an old-fashioned idea and one that collides with the modern day concept of what governments should do and of the excesses of the consumer society.
An emphasis on education and training also is an old-fashioned idea although it was the basis of economic productivity and inventions in the nineteenth and early twentieth centuries in the United States. And, this particular emphasis is one that collides with the modern-day approach to “certification” and the building up of “self-esteem” where everyone passes or everyone gets A’s.
The current sovereign debt crisis is not going to go away with “doing more of the same.” Yet, changing the economic paradigm is going to be difficult. We see this on the streets of Greece…and Spain…and Vancouver…oops, sorry…
The focus is on Greece right now and rightfully so. But, the lessons need to be learned by others…but this will not make it any easier. Long-run solutions are never “easy”.
There was an interesting article in the Saturday Wall Street Journal titled, “What Kind of Game is China Playing?” (Link)
The answer is that American leaders need to learn how to play the game of “Go”, an ancient Chinese board game. The game of “Go”, “emphasizes long-term planning over quick tactical advantage, and games can take hours. In Chinese, its name, wei qi (roughly pronounced “way-chee”), means the “encirclement game.”
The economic paradigm of the past fifty years emphasizes “tactical advantage”, the short-run. Why this approach became so popular was that the political leaders of the western world saw it as the means of gaining their goals…getting elected and then getting re-elected.
What El-Erian and others are arguing for is more emphasis by these political leaders on the “strategic” and not the “tactical.” The “strategic” aims to achieve “sustainable” results. The “tactical” way of dealing with a problem always contains the caveat that the other problems will be dealt with when they become the major issue.
Well, the other problems have now become the major issue.
And, this is the lesson for the countries included within the definition of the western world.
Politicians are going to have to learn how to think “strategically.” The question is, “Can politicians be allowed to think strategically in a democracy in which winning the next election is the most important thing on their agenda?”
Greece, in my mind, is going to have to restructure its debt in one way or another. So is Ireland…and so is Portugal…and so in Spain…and so on and so on. How many more countries will find themselves facing a restructuring of their debt is, of course, unknown.
It is painful when you find out you have been working with a model that is not correct. Creating more spending and more debt is not the solution to every problem. Yet, we have lived by this model for a long time. And, now the bill seems to be coming due.
To me, this is what is causing the worldwide government debt crisis.