Scenarios for Recovery:How to Write Down the Debts and Restructure the Financial System
The Choice Before Us: Suffer debt deflation, or write down the debts
The world faces a choice between trying to recover the Bubble Economy’s debt-leveraged gains, or realizing that the financial sector has careened along an unsustainable path since 1980 and therefore that a fresh start has to be made.
The “business as usual” approach is to keep today’s debt overhead on the books and bail out insolvent banks. This policy implies that financialization was a viable way to get rich in the first place. But the effect is to polarize economies further between creditors and debtors. Economies will shrink as a result of debt deflation, and falling tax revenues will push government budgets deeper into deficit – unless they cut back spending, which will make the downturn worse and threaten full-fledged depression. Unemployment will lead to emigration, the balance of payments will worsen and economies will be even less able to pay their debts.
The alternative is to see where this path is leading, and to write down debts sooner rather than later. This restores a more progressive distribution of wealth and income, and revives the economy’s competitive position. The problem is that annulling debts also annuls financial claims on the “savings” side of the balance sheet. Creditors – led by the 1%, who have obtained most of the economic gains over the past thirty years – prefer to maintain their financial gains even at the cost of undercutting society’s longer-term growth.
This opposition of interests obliges nations to choose between resuming prosperity or vesting a financial oligarchy to lord it over the remainder of the 21st century.