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Aug. 31, 2011, 12:00 a.m. EDT
By Matthew Lynn
LONDON (MarketWatch) "” The one thing you need to know about the global economy right now is also pretty simple. It's not the Wild West. We don't have anyone riding into town with a six-shooter.
Every time you open a paper, look at a new website, or read a research report from one of the big banks, a serious sounding economist is complaining that "we're out of bullets."
It has become the cliché du jour. There are no tools left to lift a global economy that is clearly slowing down, runs the argument. Central banks can't cut rates any more. Government can't increase their deficits. Even the big bazooka of the "bullets" school of economics "” quantitative easing "” has been put on hold, for now at least.
But so what? This is not a fight between gunslingers. Nobody is in a bunker.
In fact, if we are out of bullets, that is a good thing. Artificial stimulus measures by central banks and politicians were part of the problem, not part of the solution.
A bipartisan panel charged with proposing at least $1.2 trillion in deficit reduction measures Tuesday tapped a senior Republican tax expert to head its staff. Janet Hook has details on The News Hub.
Underneath the surface, the two big Anglo-Saxon economies "” the U.S. and Britain "” are actually making sold progress on getting down excessive debt levels that were the root cause of the problem. Once they wean themselves off quick fixes, they can add a few more policies to the mix "” lower taxes, and less red tape for example "” and their economies should be back in good shape.
The bullets cliché has been unavoidable. In the run-up to Federal Reserve Chairman's Ben Bernanke's speech at Jackson Hole last week, market pundits were desperately looking for some sign of a fresh wheeze for juicing the economy up again.
Printing more money? Buying longer-dated bonds? Buying equities or real estate directly? Perhaps even buying Spanish or Italian bonds? They were all touted as possible options for the Fed.
In the event, all we got was a relatively sober assessment of where the economy is, and where it is going. That was generally presented as a bad thing. In fact the reverse is true.
The one bit of good news out there is that we cannot artificially pump up the economy any more. The two big Anglo-Saxon economies have spent a whole decade doing just that. In 2001, when George W. Bush became president, U.S. debt was $5.9 trillion. Now it is more than $14 trillion. The U.K.'s debt was £290 billion in 2000. Now it is £1,033 billion. What did we get for all that? Is unemployment lower, productivity much higher, or the trade deficits narrower. No.
In fact, the endless stimulus programs have made things worse.
What the world has been going through is a debt crisis. The solution to that "” as probably everyone apart from a Nobel-prize winning economist could have told you "” was not more debt but less.
Take the U.K., for example. By 2008, according to calculations by the McKinsey Global Institute, when you added up everything, the total amount the British owed in one way or another came to a staggering 489% of gross domestic product. Japan wasn't much better, with total debts of 459% of GDP. The U.S. was slightly more restrained, with total debt of just under 300% of GDP. But the figures were shocking throughout the developed world.
What we suffer from is broken balance sheets. Consumers, governments, and parts of the corporate sector (mainly the banks, as it happens) are staggering under too much debt. It weighs them down. Companies don't invest, individuals don't spend, even governments become reluctant to keep expanding.
The fix? Gradually work down the debt and get your balance sheet into better shape. And, in fact, that is precisely what is happening. "Households also have made some progress in repairing their balance sheets "” saving more, borrowing less, and reducing their burdens of interest payments and debt," noted Bernanke last week.
Quite so. According to figures from the New York Federal Reserve, total consumer debt in the U.S. now stands at $11.4 trillion, a reduction of $1.08 trillion, or 8.6%, from its peak level back in the third quarter of 2008. Similar forces are at work in the U.K. According to the latest figures from the Bank of England, British households now run a financial surplus of 2% of GDP, compared to minus 6% at the height of the credit bubble. Just as they are in the U.S., they are gradually getting their balance sheets back into shape again.
Debt is coming down in absolute terms. That is not all. Look at it in nominal terms, and debt is falling even faster. Inflation in the U.S. is currently running at an annual rate of 3.4%. In the U.K. it is running at 4.4%. And those are just the official figures "” the real ones may be a lot faster. That may be a bad thing in lots of way, but it also erodes debt pretty fast. Add the two together "” the absolute repayments, and the impact of inflation "” and debt is going to be back under control fairly soon. Not this year, and not next either "” recovering from a debt bubble was never going to be fast. But by 2013 and 2014, both economies should be looking a lot healthier.
For all the gloom over the global economy right now, at a fundamental level, the Anglo-Saxon economies are fixing themselves. So long as they avoid the easy option of yet more stimulus measures, they will in due course emerge in much better condition. Add in some structural reforms "” lower taxes, and fewer restrictions on entrepreneurs "” and by the middle of this decade the may even be looking positively healthy. Given how terrible they looked in 2008, that will be an impressive result.
Stock markets will go up and down as they always do, but what counts for the medium-term is fundamental economic strength "” and that is slowly improving. Eventually, even the markets will catch up with that. Just so long as they can stop looking for "bullets" to be fired at the problem, that is.
Matthew Lynn is a financial journalist based in London. He is the author of "Bust: Greece, the Euro and the Sovereign Debt Crisis," and he writes adventure thrillers under the name Matt Lynn.
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