Opinion
narily strong monetary responses , global growth has been sluggish and inflation benign . It is possible this may change , especially if governments become less frugal , but it is by no means a slam dunk that any fiscal policy stimulus will be sufficient to create growth and / or inflation . In fact , such a route may burden the economy with more debt , bringing the problems back to square one .
Against this backdrop , the potential for incremental monetary policy easing to accelerate growth – through more bond purchases or cutting interest rates deeper into negative - does not look great . Indeed , the theory that negative interest rates spur higher saving , instead of spending - as people prepare for retirement - is gaining more advocates ( although I am not sure raising interest rates will encourage them to spend , either ).
This leaves us with the last option – that of debt write-offs . Historically , this has been done by governments defaulting on their debt obligations . Argentina and Greece have been serial defaulters ( Argentina , ironically , successfully tapped international bond markets in April for the first time since its 2001 default ) and the pain that this causes to the economies is clear for all to see .
One idea that is getting some airtime , but is not yet being taken seriously , is that of debt forgiveness , rather than default . This may sound crazy : who in their right mind would lend somebody money and then say that there is no need to pay them back ? But if we think about who owns this debt , then the idea becomes less fanciful . Years of quantitative easing by the developed economies have resulted in a lot of government debt being owned by central banks with theoretically unlimited access to money ( through their control of the printing presses ). What is to stop a central bank from writing off the debt that it is owed ? genuine fears that doing so could spark uncontrollable inflation - direct monetary financing of government deficits rarely end well ( ask anybody in Zimbabwe or read the history of the Weimar Republic in pre-World War II Germany ). But one has to believe there is a potential tipping point at which the downside risks of such action ( hyperinflation , or at least much higher inflation ) is less than the downside risks of inaction - ie . a depression . After all , central bankers have better tools to tamp down inflation than to fight deflation .
Are we there yet ? Clearly not . No central bank is seriously considering such action . Japan is probably closest – its economy and inflation are currently faltering and the Japanese yen rallying despite massive amounts of monetary stimulus . Would more bond ( and equity ) purchases or more deeply negative interest rates really help ? I doubt it . But if the Bank of Japan were to write off significant chunks of government debt , it would eradicate the need for fiscal consolidation and take the brakes off the economy .
Of course , longer term , other constraints would have to be dealt with as well . Economic reforms , both in the developed and the emerging world – which would ultimately boost productivity , reduce inequality and raise overall global demand for goods and services – are the real answer to the world ’ s problems . But reforms take time to deliver . Meanwhile , a debt write-off may buy significant time for the authorities to implement innovative measures to increase supply-side efficiency and revive global growth .
In practice , there are significant constraints : it is likely to be politically unpalatable and there maybe
52 June 2016