Is America pushing the world irretrievably into disaster with its fiscal adventurism?
Like the umpteenth review of a bad film that we have already watched, the downgrading of United States debt by Standard & Poor’s was neither revealing nor surprising. The world’s largest economy has lived beyond its means for a very long time until its debt burden exploded into $14.6 trillion, more than thrice the entire wealth of all the world’s 1,210 billionaires on Forbes List.
But what is disconcerting to the rest of the world is the apparent nonchalance of the US political system. Beyond a bipartisan commitment to brinkmanship, America hasn’t offered a credible policy to dig itself out of this fiscal quagmire.
Even the world’s poorest economies have paid the price for America’s folly — in the form of elevated inflation. Violent protests are becoming common across such nations. Europe is a poor copy of the US, with all the bad borrowing habits but without the quick capacity to print currency. China’s debts have been exposed to be much higher than admitted previously. India is in the throes of widening public unrest against a regime perceived to be weak and corrupt. Growth is sagging in both emerging economies.
In other words, is America leading the world in a march towards an economic disaster not experienced by anyone living? This is the question that four leading economists with a foot on the ‘Ground Zero’ of this mayhem answer in the following pages.
Profile: Economic advisor to the Indian Prime Minister; professor of finance, University of Chicago’s Booth School of Business; advisory council member, U.S. FDIC; former chief economist, International Monetary Fund.
Key Ideas:
Trying to inject more economic stimulus will offer diminishing returns.
So the Dutch, French, Germans, Finns and probably Belgians and Luxembergers must join in a monetary union outside of the ECB. It is a radical solution, but it is only one that can bring back growth in Europe and prevent some of the problems we see today. Other countries outside of this porous union must depreciate their currencies and start all over again. They must qualify afresh for the union. The Europeans have tried it many, many times before. So it won’t be news to them.
Lessons for India
(This story appears in the 09 September, 2011 issue of Forbes India. To visit our Archives, click here.)