MohamedEl-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-relatedproblems: the economy is unable to grow, and the debt burden is enormous. (http://blogs.ft.com/the-a-list/2011/06/17/only-a-totally-new-greek-approach-can-save-europe-now/)
Yet, El-Erian states, neitherof these issues are being addressed in the discussions going on concerning the resolution of thedebt crisis in Greece.
The reasonsfor this are complicated although they very often boil down to the priority tohandle short-run problems immediately and postpone the long-run problems toanother day. Of course, the famous quoteof John Maynard Keynes comes to mind: “In the long-run we are all dead!”
A goodlisting of the complicated entanglement of the politics of the Eurozone ispresent in the Wall Street Journal article “Europe’s Greek Stress Test” by JohnCochrane and Anil Kashyap. (http://professional.wsj.com/article/SB10001424052702304186404576389542793496526.html?mod=ITP_opinion_0&mg=reno-wsj)The authors list four key facts:
“First,the Greek government has borrowed more than it can plausibly afford to pay andcertainly more than it will choose to pay. It now owes more than one and a halfyears’ economic output.”
“Second, European banks are holding the bag.”
“Third, the European Central Bank (ECB) is nowinvolved as well.
“Fourth,in the end this is all about Ireland, Portugal, Spain and Italy.”
In other words, by ignoring the basic underlying causes ofthe problem, the sickness has spread and now envelopes nor only Europe…but theworld.
In other words, the old economic paradigm is dead, and thepolitical leaders of the western world have only made things worse by trying tokeep the old paradigm alive.
As a consequence, the options available to these leaders areshrinking and those options that are left are becoming less and less desirable.
And, even if the bailouts continue and postpone theresolution of the crisis until another day, the two basic issues mentioned byEl-Erian are not being addressed. Theseare the issues pertaining to the reasons for slow economic growth and thereduction 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 politicalleaders of most western nations worked with an economic paradigm that resultedin an increase in debt levels to increase economic growth. That is, credit inflation, whether in theeconomy as a whole, or in a particular sector like housing, would buypoliticians additional votes by keeping economic growth high and unemploymentlow.
“The solution” reverses almost 100 years of the economic andpolitical thought of western intellectuals. It also contradicts the perception of many voters in westerncountries.
Keeping a lid on debt exposure is an old-fashioned idea andone that collides with the modern day concept of what governments should do andof the excesses of the consumer society.
An emphasis on education and training also is anold-fashioned idea although it was the basis of economic productivity andinventions in the nineteenth and early twentieth centuries in the UnitedStates. And, this particular emphasis isone that collides with the modern-day approach to “certification” and thebuilding up of “self-esteem” where everyone passes or everyone gets A’s.
The current sovereign debt crisis is not going to go awaywith “doing more of the same.” Yet,changing the economic paradigm is going to be difficult. We see this on the streets of Greece…andSpain…and Vancouver…oops, sorry…
The focus is on Greece right now and rightfully so. But, the lessons need to be learned byothers…but this will not make it any easier. Long-run solutions are never “easy”.
There was an interesting article in the Saturday Wall StreetJournal titled, “What Kind of Game is China Playing?” (http://professional.wsj.com/article/SB10001424052702304259304576374013537436924.html?mod=ITP_review_0&mg=reno-wsj)The answer is that American leaders need to learn how to play the game of “Go”,an ancient Chinese board game. The gameof “Go”, “emphasizes long-term planning over quick tactical advantage, andgames 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. Whythis approach became so popular was that the political leaders of the westernworld saw it as the means of gaining their goals…getting elected and thengetting re-elected.
What El-Erian and others are arguing for is more emphasis bythese political leaders on the “strategic” and not the “tactical.” The “strategic” aims to achieve “sustainable”results. The “tactical” way of dealingwith a problem always contains the caveat that the other problems will be dealtwith 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 withinthe definition of the western world.
Politicians are going to have to learn how to think“strategically.” The question is, “Canpoliticians be allowed to think strategically in a democracy in which winningthe next election is the most important thing on their agenda?”
Greece, in my mind, is going to have to restructure its debtin one way or another. So is Ireland…andso is Portugal…and so in Spain…and so on and so on. How many more countries will find themselvesfacing a restructuring of their debt is, of course, unknown.
It is painful when you find out you have been working with amodel that is not correct. Creating morespending and more debt is not the solution to every problem. Yet, we have lived by this model for a longtime. And, now the bill seems to becoming due.
To me, this is what is causing the worldwide government debtcrisis.
