Beware of the global debt trap
WE have the Greeks to thank for an elementary tutorial in what ails the world economy. Greece's central problem is that it has too much debt and too little economic growth (none actually) to service the debt. The country is caught in an economic cul de sac. It can't seem to generate growth without spending more or taxing less, which makes the debt worse, while its creditors demand that it control its debt by spending less and taxing more, which undermines growth.
If there were an easy exit from this dilemma, Greece would have taken it. But it's important to note that Greece's predicament, though extreme, is shared by many major countries, including the US, Japan, France and other European nations. Reducing or stabilising their high debt levels encounters the same stubborn contradiction: The effort to curb debt through higher taxes or lower spending initially weakens economic growth, and weaker growth - aside from its social consequences - increases the debt.
When only a few countries are over-indebted (meaning that they cannot borrow from private markets at reasonable interest rates), this is not necessarily true. Countries can dampen domestic consumption and rely on export-led growth to take up the slack and limit unemployment. Nor is debt automatically bad. It has obvious productive uses: to fight severe recessions; to pay for wars and other emergencies; to finance public "investments" (roads, schools, research).
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