The Globalist: Toward a New Magna Carta

Mirtchev, A. & Bailey, N. (2011, March 31). Toward a New Magna CartaThe Globalist.

The GlobalistIn the year 1204, the doughty knights of the Fourth Crusade entered Constantinople by stealth and thoroughly looted what was then the wealthiest city in the world. Their plunder allowed them to pay their debts to the Venetians, who had financed the endeavor, as well as to line their own pockets. The knights took huge quantities of gold, silver and precious stones with them when they returned to Western Europe.

Eight centuries later, governments worldwide are sinking in an ocean of debt — extensive, and in some cases untenable, liabilities and strained balance sheets. The countries that are most visibly plagued by a combination of excessive indebtedness and low-growth prospects appear to be the developed democracies of the West and Japan.  U.S. debt held by the public today stands at over $9.6 trillion (not including debt held by foreign central banks), and total debt is approaching 90% of GDP. In much of Europe, the circumstances are even worse — Greek long-term bonds are trading at a nearly 10% premium over the benchmark German bunds, with Portugal not far behind.

As a result, the global debt burden appears to have gathered an unstoppable momentum, prompting divergent reactions. Some respond with grand plans and declarations, as well as immediate measures that, at the end of the day, amount to punting — sure, the painful steps should be taken, but perhaps not yet. Others argue that the longer the remedies are delayed, the more painful the solution will feel.

On the practical side, debt problems are currently being addressed in the main by focusing on important but not decisive matters and often tackling the symptoms (liquidity, primarily) rather than addressing the underlying cause (lack of solvency).

Pumping liquidity in the ocean of debt in this manner, instead of reducing the level of the waters by improving solvency, is actually exacerbating the seriousness of debt problems. Even more importantly, despite the immediate political imperatives driving much current decision making, the weakening of solvency reflects the true nature of the global financial crisis and the impending global debt disaster.