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Failure to deal with debt hurts on both sides of the Atlantic

by Aaron McCormack on September 15, 2011

The financial world – and therefore the real economy apparently –  is once again lurching from crisis to crisis.  There are many examples, big and small, of how a failure to deal with core indebtedness is continuing to impede real progress.  Politicians are frantically working on short term issues (especially on how they can make political capital from them….) and the longer term structural problems are only discussed in passing.

Two painful examples this week.  At the macro level Greece is once again proving problematic.  This blog and others have long pointed out that not only is Greece fundamentally insolvent, but so is Ireland (with the current banking debt appended) and Portugal. The debt will have to be restructured sooner or later….and significantly so.  French banks wrote down Greek debt by 20% earlier this year when a 60% haircut is more realistic.  A default (orderly or otherwise) is unavoidable.

It doesn’t mean that the Irish, Greeks, Portuguese and the Italians can avoid austerity however.  Even if debt is significantly restructured, most of these countries continue to need massive surgery on their national finances – Greece in particular is still running a primary deficit (i.e. before debt servicing is even taken into account).

And in the United States, a small but quirky example of debt run amok.  The US Postal Service faces a $5 billion loan repayment at the end of September that it will not be able to make.  Like a small country, it will need some form of bailout or it will cease to function as it runs out of cash.

Instead of adjusting to prevailing market conditions the US Postal Service continued to run too many post offices with too many people charging too little for its services.  It made up the difference with loans.  When demand slumped during the recent recession the USPS was brutally exposed – just like Greece or Portugal or Ireland.

Ever-expanding debt and leverage has spent over twenty years finding its way into each and every nook and cranny of personal finances, businesses and countries.  No amount of government intervention can prevent the great deleveraging that has to happen.  Not the Federal Reserve opening its discount window.  Not the ECB buying junk Greek treasuries from French banks.  Not UK quantitative easing.  None of it.

We face years of weak demand as house prices continue to decline, consumer credit continues to contract, governments continue to struggle to balance their books and businesses find little or no reason to invest – at least in the West….

It comes right at the worst strategic moment if you care about the competitiveness and cohesion of nation states like the USA.  Figures issued by the US government this week revealed that over 48 million Americans now live below the poverty line.  That poverty line is a paltry $22,350 per annum for a family of four.  Nearly 60% of all Americans will spend at least a year below the poverty line in their lifetimes.  These figures have been getting worse for years.  The contraction or, at best, stagnation of our economy will do little to help these folks.  The new Obama Jobs Plan will do little to help these folks.  Repealing all the regulations on the books will not fix this.  There is no quick fix.

It will take years of retooling and innovation to create a new wave of jobs in the USA .  It will need investment in education and in training and in R&D.  American companies may will invent the technologies that spur a new wave of growth, but there is nothing to guarantee that the jobs and the “value” will accrue to Americans.

While we continue to tinker with debt issues and play politics with the symptoms of the great deleveraging, the rest of the planet continues to innovate and develop and grow and prosper.  We need to lift our eyes from our shuffling feet and to the horizon.  Those currently hurting may not see much relief as we restructure, but it is the only way to give future generations a fighting chance.

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