Adair Turner on "Debt Déjà Vu"
Writing for Project Syndicate, Adair Turner, Chairman of the Institute of New Economic Thinking discusses debt, and the “failure to grasp the strength and global nature of the deflationary forces now shaping the economy.”
He explains that we are in a trap where debt burdens shift among sectors and countries, as a result of the debt used to fund real-estate investment and construction. In the United States and several European countries, excessive debt creation before 2008 was followed by efforts at private deleveraging, initially offset by large government budget deficits.
After a collapsing external demand in late 2008, Chinese growth and employment was threatened, resulting in the Chinese government unleashing a massive credit-fueled construction boom. Turner states, “Within China, the consequences for growth may be less dire than some commentators fear: a rapidly tightening labor market is boosting real wages; household consumption is growing strongly; and a buoyant services sector is helping to create ten million new jobs per year.” But for the rest of the world’s economy, the consequences of the slowdown in China’s construction and industrial sectors are profound, and the QE alone cannot stimulate enough demand in a world where other major economies are facing the same challenges.
Turner concludes, “Seven years after 2008, global leverage is higher than ever, and aggregate global demand is still insufficient to drive robust growth. More radical policies – such as major debt write-downs or increased fiscal deficits financed by permanent monetization – will be required to increase global demand, rather than simply shift it around.”