David M. Smick writes: Today the big thinkers are debating whether a growth strategy for Greece (if not the entire eurozone periphery) should entail further debt relief, this time from public creditors. But here’s the thing: Are the smartest guys missing an even more important picture? The entire world’s public and private debt, depending on the means of measurement, now exceeds a whopping $180 trillion. What’s the significance of this massive debt? Is it sustainable? Is it one reason for the world’s subpar growth? Nobody knows. If a global deflation scenario unfolds, the level of the world’s real debt will grow to the point where massive rolling defaults could become a terrifying fact of life. In an aggressive inflation scenario, on the other hand, the debt’s value in real terms will shrink, but at a brutal cost to the livelihoods of working families if not to capitalism itself. The obvious solution is to control the growth of future debt while encouraging a global explosion in innovation and productivity growth. This is what the British did in dealing with their horrendous debt after the Napoleonic Wars.
In an environment of record-low global interest rates, in which a lot of economic activity has been moved forward, an explosion in innovation and higher productivity growth may be the only safe way eventually out of today’s low interest rate trap. But an explosion in innovation that leads to higher global growth entails the issue of human motivation. People have to believe the future will be better than the past. That’s not the case today. Yet in the period since the 2008 crisis, the smartest guys have consistently argued that money is the driver of human behavior.
In response to the crisis, for example, the world’s governments and central banks bet the farm on a giant money-driven rescue operation the size of which the world had never before seen. More than $17 trillion, or 25 percent of global GDP, went for stimulus, bailouts, and guarantees. The result: After an initial sugar rush of economic activity, global growth, trade, and cross-border financing since 2010 have all plummeted. Today’s slow-growth environment is helping spawn a geopolitical nightmare. It turns out the massive flood of money failed to drive human behavior, at least to a level expected by historic standards. The lesson here is that money is just a measuring tool. As Adam Davidson wrote in the New York Times, “What actually matters is what we make and do and feel and want.”
Stated in short: In achieving higher levels of economic growth, attitude matters. Record low interest rates and generous fiscal stimulus are meaningless if people have no confidence in the future. So where does this all end? The world faces a troubling nexus of unprecedented debt, record low interest rates, exploding central bank balance sheets, declining growth, worldwide asset prices that may or may not reflect true value because the policymakers have their thumbs pressing down on the scale, a global currency war against the dollar as dollar-denominated debt is approaching $15 trillion, all at a time when polls consistently show people believe their children’s future is in jeopardy. Does anybody know the end game to this bewildering scenario? Or should we get the smart guys on the line? Confidence about the Future
