Debt Crisis: A Divorce Between Politics and Economics?

ForexNewsNow | Published on September 5, 2011 at 4:40 am

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NEW YORK (ForexNewsNow) – The markets’ madness this summer has shown that the economic crisis was much more serious than expected just a few months ago. Not too long ago, Goldman Sachs economists had predicted 4% growth for the US…But there is one thing we now know for sure: the recovery was an illusion.

The truth is that governments have not been able to create a more stable, regulated and secure financial world. The financial sector, left completely uninhibited, quickly returned to the salaries, the bonuses, and the excesses from before the crisis. Nothing had changed, but the world thought that is was a fresh start.

But then the markets started to become anxious because they found a new weakness in Western economies: Debt.

Why the debt issue?

The real problem is the fact that the markets lost confidence in the ability of politicians to respond to globalization in other ways besides simply accruing debt.

For twenty years before the relatively recent competition of emerging countries, Japan, the United States and Europe maintained their standard of living on credit – by private or public debt. The subprime crisis should have been a warning that Western economies were arriving to an impasse.

However, like Japan in the 1990s, developed countries focused on rescuing failing banks and have, with stimulus packages, tried to buy more time, adding debt to the debt. In the United States, because of a sharp political difference between Republicans and Democrats and, in Europe, because of its intertwined and overlapping institutions. Either way, the result is the same.

The financial markets began to believe that Western politicians were not capable of implementing painful structural reforms. Western economies are threatened with a potential “Japanization” of their economies with low growth, an accelerated decline vis-a-vis China, and recurrent problems of debt and continuing political instability. The crisis came back this summer because of a deep divide between politics and economics.

The mariage of politics and economics had been the strength of Western countries for more than two centuries. This current failure to adequately choreograph the two is their current weakness.

It appears that the markets keep on trying to tell governments that debt is just the sum of their accumulated cowardice. The answer is not only austerity. The real solution is to find the courage and resolve needed to encourage economic actors to regain confidence in Western economies. And this challenge may hopefully begin this week in Washington, with US President Barack Obama’s speech to Congress about a new job stimulus package.

 

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