Economy: Debt Crisis Forever?

Pessimism rules. These days there is no lack of gloomy forecasts. Almost every day someone predicts a bleak future. The newest example is a paper by Carmen Reinhart (Peterson Institute for International Economics in Washington), Vincent Reinhart (U.S. economist for Morgan Stanley in New York) and Kenneth Rogoff (Harvard University), published by the influential National Bureau of Economic Research (businessweek.com).

These economists claim that the U.S. and other developed economies with high public debt potentially face “massive” losses of output lasting more than a decade". If they are right the U.S. economy will grow very slowly until at least the year 2020.

These pessimists refer to historical data which show that in the past countries with debts exceeding 90 percent of the economy have historically experienced subpar (lower than usual) economic growth for more than 20 years. That has left output (and wealth) at the end of the period a quarter below where it would have been otherwise. 

I reckon that these gloomy economists are just following the negative zeitgeist and their paper is a waste of government money. They are just extrapolating the negative trends of the present into the (alleged) future. They have a static view and ignore the strong dynamics which are changing the global economy.

I believe that these bean counters underestimate at least 2 positive trends which should fuel strong growth in the coming years:

1.  Ongoing Globalization - The catching up process of China and other emerging markets especially fuels the growth of the global economy. Companies in the U.S. and other highly indebted countries benefit strongly from the growing markets in Asia and Latin America which create rising profits and income for the employees. 

2. Accelerating Technological Progress - iPhones, iPads, cloud computing, and rooting etc. create new markets and reduce production costs which lead to rising income and wealth.

And the study has more flaws. It ignores forces which already reduce the government debts. The U.S. and other highly indebted countries are now practicing an austerity policy (drastically lower public expenditures) which will reduce the government debt in the coming years. There also are economic forces which will lead to lower governments debt:  Fast climbing company profits, which are fruits of rising efficiency, will spill more money into public cash boxes. Plus climbing stock prices and rising consumer spending which will do the same.

I reckon that all these factors will play together and lead to a much healthier and wealthier global economy than these people think.