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Unresolved debt leaves frustratingly slow growth as the best likely outcome, writes Satyajit Das.
In 2008, panicked governments and central banks injected huge amounts of money into their economies, in the form of government spending, tax concessions, ultra-low interest rates and "non-conventional" monetary strategies - code for printing money.
The actions prevented the Great Depression 2.0 temporarily, converting it into a deep recession. The US economy shrank by 8.9 per cent in 2008.
As individuals and companies reduced debt as banks cut off the supply of credit, governments increased their borrowing, propping up demand to keep the game going for a little longer. Governments gambled on a return to growth, solving all the problems.
That bet has failed and high levels of government debt in some developed nations have become the central problem. Greece is Patient Zero in the global sovereign crisis, highlighting deep problems in public finances of developed nations.
The sovereign debt problem is global. The US, Japan and others also owe more than they can repay.
At best, governments will cut spending or raise taxes to stabilise government debt as public sector solvency becomes the priority.
Reduction in government spending will slow growth, making the task of regaining control of government finances more difficult. This may require deeper cuts in governments' spending and ever-higher taxes, miring the developed world in low growth for a protracted period.
At worst, some governments overwhelmed by their debts will default, causing a major disruption in financial markets, perhaps setting off a deep global recession....
The risk of instability is very high. A more violent correction and a breakdown in markets, as in 2008 or worse, are possible. Frequent bouts of panic and volatility as the global economy deleverages - reduces debt - are likely. Problems created gradually over more than the past three decades can be corrected only slowly and painfully....
The global economy, too, needs airflow - smooth, steady and strong growth. Unfortunately, the global economy's stick shaker is vibrating violently. It remains to be seen whether the economic pilots can regain control and land the flight safely or whether it ends in a crash.