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Free trade has had its time

By Chris Lewis - posted Wednesday, 19 October 2011


Country Debt 1980 1990 2000 2010
USA Public 46 71 58 97

 
Household 52 64 74 95
Japan Public 53 66 145 213

 
Household 60 82 87 82
Germany Public 31 42 61 77

 
Household 59 61 73 64
UK Public 58 42 54 89

 
Household 37 73 75 106
France Public 34 46 73 97

 
Household 27 46 47 69
Italy Public 54 93 126 129

 
Household 6 21 30 53
Australia Public 43 46 37 41

 
Household 42 46 74 113
Austria Public 36 59 76 82

 
Household 41 41 47 57
Belgium Public 61 140 121 115

 
Household 35 38 41 56
Denmark Public 36 77 73 65

 
Household
 

 
95 152
Finland Public 16 23 67 57

 
Household 29 48 35 67
Greece Public 26 83 124 132

 
Household 8 9 20 65
Netherlands Public 65 97 67 76

 
Household 43 49 87 130
Norway Public 43 38 44 65

 
Household
 

 
64 94
Portugal Public 36 68 63 107

 
Household 15 23 75 106
Spain Public 27 49 71 72

 
Household 24 41 54 91
Sweden Public 58 54 77 58

 
Household 53 61 51 87

Some 2010 figures refer to 2009

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So what are the answers? While they are difficult, the acceptance of recent policy trends is limited in the longer term, notwithstanding Australia's benefit from supplying raw materials to the fastest growing region in the world (especially China).

At present, Western governments desperately cling to a misguided hope that more and more debt is needed to save banks, boost share prices and somehow restore the magical days of economic growth. As the Bank for International Settlements declares,

...there is a clear linkage: high debt is bad for growth. When public debt is in a range of 85% of GDP, further increases in debt may begin to have a significant impact on growth: specifically, a further 10 percentage point increase reduces trend growth by more than one tenth of 1 percentage point. For corporate debt, the threshold is slightly lower, closer to 90%, and the impact is roughly half as big. Meanwhile for household debt, our best guess is that there is a threshold at something like 85% of GDP, but the estimate of the impact is extremely imprecise.

There are no easy policy solutions out there, as reflected by the Swiss National Bank recently announcing moves to stem the flow of money into Swiss Francs in order to protect its exports.

For heavily indebted nations, there is likely to be painful reform, and this is why public dissent is increasing in many Western nations as governments struggle for answers.

Just recently, and following on from the Tea Party movement which aims to shrink the size of government and cut federal spending (with 60 of 435 US representatives now identifying themselves as party members), protests spread from Wall Street, New York to many cities around the world. In the US alone, signs, slogans and discussion focused on opposition to bank foreclosures, corporate influence in politics, the wars in Iraq and Afghanistan, insufficient job prospects, currency devaluation, affordable housing and universal health care, and fixing inner-city schools.

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Dissent is hardly likely to go away. In the four years since the US recession began, the US civilian working-age population has grown by about 3 per cent yet the economy has 5 per cent fewer jobs (6.8 million jobs) with the real unemployment rate 15-20 per cent. With poverty levels rising recently to now affect 46.2 million Americans, the bottom fifth of households that made $20,000 or less in 2010 saw their incomes decline 3.8 per cent after inflation.

In countries like Greece, Ireland, Portugal and Spain, unemployment is already around 20 per cent (youth unemployment around 40-50 per cent) at a time when such economies have shrunk by 10-20 per cent.

Western societies are somehow expected to create employment and wealth at a time when domestic consumption already comprises 60-70 per cent of GDP.

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About the Author

Chris Lewis, who completed a First Class Honours degree and PhD (Commonwealth scholarship) at Monash University, has an interest in all economic, social and environmental issues, but believes that the struggle for the ‘right’ policy mix remains an elusive goal in such a complex and competitive world.

Other articles by this Author

All articles by Chris Lewis

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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