TOWARD A NEW MAGNA CARTA ALEXANDER MIRTCHEV AND NORMAN BAILEY

The world economy cannot count on growth to solve the global debt problem – and stimulus measures are not a sustainable solution. In the third installment in their series “The Search for a New Global Equilibrium,” Dr. Alexander Mirtchev and Dr. Norman Bailey argue the time is ripe for a “new Magna Carta” – a redefinition of the social contract among the government, Main Street and Wall Street. As always, the ultimate hopes of addressing the issue of debt appear to be pinned on growth as a way out of the rising waters of debt. Rightfully so. And yet, in the current economic circumstances, growth seems more likely to come from a divine miracle than from mere mortals making the difficult choices that must be made.In reality, the prospects of global economic growth in the context of prevailing indebtedness are faced, on one side, by the Scylla of austerity measures and the Charybdis of stimulus packages that invariably lead to higher states of indebtedness. Essentially, a damned-if-you-do, damned-if-you-don’t conundrum.

The threat posed by Scylla entails accommodating, on one side, the imperatives for sometimes draconian austerity measures, which could, however, have a dampening effect on growth by restricting demand.

In Portugal, the government has cut state pensions by up to 10%, cut public sector salaries by 5% and increased the value-added tax to 23%, one of the highest rates in the world. Subsequently, the government fell.

Similar measures are being taken in Spain, Ireland, Greece and elsewhere. Furthermore, the reactions to such measures should not be overlooked – witness the demonstrations that regularly take over the streets of Athens, Paris or Lisbon (and Madison, Wisconsin).

On the other side is Charybdis – the prospects for inducing growth via stimulus packages confronted by mounting debt that can lead to stagnation. When total debt in Japan rose beyond 90% of GDP, for example, the effect of adding further debt was to restrict growth. In other words, in the current situation, chasing growth to breach the surface of the ocean of debt does not break the vicious circle – it reinforces it.

We are unlikely to navigate safely between these two ancient monsters. There is no evidence that the prospects for a debt tsunami would dissipate in their own right. Now that Social Security payouts exceed income – more than $ 200 billion this year and trending towards $ 1 trillion within the decade, according to the 2009 Financial Report of the U.S. Government – entitlement programs in the United States are reaching the point of no return, adding significantly to the debt service burden each year.

Many developed and developing economies are also exposed to increasing demands on the state to finance a range of social commitments, from pensions to infrastructure-development financing. U.S. states such as California, New York, Florida, New Jersey, Ohio, Indiana and Wisconsin are tackling budget shortfalls of up to 30%, and cities such as Chicago are facing deficits of close to 10%.

In Europe, cities like Lisbon, with its 7.3% deficit, are urgently looking for ways to cut costs, while entire regions in Spain, Britain, Belgium and elsewhere are themselves insolvent, adding their buckets of water to the debt ocean.

The examples of the devastating effect of the debt burden range from the unsustainable premiums countries like Greece and Portugal must incur when raising funds, to the case of Iceland, where the whole country went bankrupt.

Source from www.neweconomictrends.com