Warning of global stall may come too late to avoid crash

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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.

Some interesting reading on a Monday morning on the possible fate of the global economy as the banking and Eurozone debt crises ratchet upward and onward toward default and possible collapse. It should be becoming clear that as another financial crisis looms, so too do the tools for dealing with such a crisis become fewer and weaker, all in an financial and economic environment that undermines the ability and capacity of governments and central banks to implement any effective strategy to contain it. I been saying this for at least a couple of months and now some media are reporting on it. It is not feasible to manage these developing crises where economic performance is weakening and massive sovereign debts continue to grow. This combined with increasing costs to insure those debts and investor confidence waning amid other growing problems lends to a very ugly outcome on the horizon.