First, the facts:
Last week, the McKinsey Global Institute issued a report titled “Debt and (Not
Much) Deleveraging,” which found, basically, that no nation has reduced its
ratio of total debt to G.D.P. Household debt is down in some countries,
especially in the United States. But it’s up in others, and even where there
has been significant private deleveraging, government debt has risen by more
than private debt has fallen.
You might
think our failure to reduce debt ratios shows that we aren’t trying hard enough
— that families and governments haven’t been making a serious effort to tighten
their belts, and that what the world needs is, yes, more austerity. But we
have, in fact, had unprecedented austerity. As the International Monetary Fund
has pointed out, real government spending excluding interest has fallen across
wealthy nations — there have been deep cuts by the troubled debtors of Southern
Europe, but there have also been cuts in countries, like Germany and the United
States, that can borrow at some of the lowest interest rates in history.
All this
austerity has, however, only made things worse — and predictably so, because
demands that everyone tighten their belts were based on a misunderstanding of
the role debt plays in the economy.
You can see
that misunderstanding at work every time someone rails against deficits with
slogans like “Stop stealing from our kids.” It sounds right, if you don’t think
about it: Families who run up debts make themselves poorer, so isn’t that true
when we look at overall national debt?
No, it
isn’t. An indebted family owes money to other people; the world economy as a
whole owes money to itself. And while it’s true that countries can borrow from
other countries, America has actually been borrowing less from abroad since
2008 than it did before, and Europe is a net lender to the rest of the world.
Because
debt is money we owe to ourselves, it does not directly make the economy poorer
(and paying it off doesn’t make us richer). True, debt can pose a threat to
financial stability — but the situation is not improved if efforts to reduce
debt end up pushing the economy into deflation and depression.
Which
brings us to current events, for there is a direct connection between the
overall failure to deleverage and the emerging political crisis in Europe.
European
leaders completely bought into the notion that the economic crisis was brought
on by too much spending, by nations living beyond their means. The way forward,
Chancellor Angela Merkel of Germany insisted, was a return to frugality.
Europe, she declared, should emulate the famously thrifty Swabian housewife.
This was a
prescription for slow-motion disaster. European debtors did, in fact, need to
tighten their belts — but the austerity they were actually forced to impose was
incredibly savage. Meanwhile, Germany and other core economies — which needed
to spend more, to offset belt-tightening in the periphery — also tried to spend
less. The result was to create an environment in which reducing debt ratios was
impossible: Real growth slowed to a crawl, inflation fell to almost nothing and
outright deflation has taken hold in the worst-hit nations.
Suffering
voters put up with this policy disaster for a remarkably long time, believing
in the promises of the elite that they would soon see their sacrifices
rewarded. But as the pain went on and on, with no visible progress,
radicalization was inevitable. Anyone surprised by the left’s victory in
Greece, or the surge of anti-establishment forces in Spain, hasn’t been paying
attention.
Nobody
knows what happens next, although bookmakers are now giving better than even
odds that Greece will exit the euro. Maybe the damage would stop there, but I
don’t believe it — a Greek exit is all too likely to threaten the whole
currency project. And if the euro does fail, here’s what should be written on
its tombstone: “Died of a bad analogy.”
