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How do we resolve the global debt overhang? Image

How do we resolve the global debt overhang?

April 14, 2021

This is a really interesting question as the global economy is hanging literally by a thread and its called ‘Money Printing’ which some consider to be a necessary evil.


That view is not universally shared. Whilst its true that central banks had to step in to prevent a financial meltdown the notion that you can solve a debt crisis through greater indebtedness  has only served to increase economic instability in the financial system.


Central bank policies have failed. We need to address the debt overhang to engineer an economic recovery but whichever way you look at it there is pain. There are four ways to reduce the debt.


1. Austerity and higher taxes which would result in a deep recession.


2. Growing our way out of debt through stronger economic growth which is an impossibility given the debt overhang that acts as a drag on growth.


3. Creating an inflationary environment to reduce the real value of the debt.


4. The fourth option which is the one we favour is restructuring the debt in an orderly manner which involves the least pain but which could potentially undermine confidence in the financial system as it involves investors bearing the brunt of failed Central Bank policies.


There is no escaping the pain and kicking the can further down the road is not a credible policy but a dereliction of duty. A stock market correction is inevitable and desirable as the alternative is an economic and financial market collapse requiring a major reset.


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