Pass the parcel (of debt)

World leaders must come up with a plan that stimulates growth without seeing spiralling debt
Pass the parcel (of debt)
By Anil Bhoyrul
Sun 14 Aug 2011 12:21 PM

When you were a kid, did you ever play “pass the parcel”? I remember doing it many times — quite a simple game. The “adult” in the room has a parcel, usually something like a hot potato. A group of kids sit in a circle, and we each have to pass the parcel to the next one, as quickly as possible. The music starts playing. And then it suddenly stops. Whoever is left holding the parcel is finished. Out. History.

Then the music starts again, and with one less kid to play, we all pass the parcel. Eventually, only one kid is left holding the parcel — the “winner.” Except, he hasn’t really won anything except a hot potato that nobody wants, so we all roll about laughing and the adult starts the game again.

Welcome to the global economy, which has been playing exactly this game with trillions of dollars of debt since 2008 when Lehman Brothers crashed. The hot potato of debt has merely been passed around, from private to public sector. But it never went away. Now the music has stopped, the game is properly over, and nobody in the room has a clue what to do any more (or is laughing).

The numbers in this game are of course mind blowing. Currently, total US debt is around $14.3 trillion, which equates to around 100 percent of the total output of the US economy. Unemployment hovers around nine percent, and there is a one in three chance of another ratings downgrade.

The European Financial Stability Facility (EFSF) was only created last May, to help out Eurozone nations in trouble. Of the €750bn pumped in, only around €300bn is left (after commitments to Greece, Ireland and Portugal). But Italy and Spain between them need at least €700bn to settle debts maturing next year.

The volatility of global stock markets in the past week shows that few people can really make head or tail of all this, although there has been plenty of opportunistic buying and selling of equities. At one stage last week, the FTSE 100 had fallen by 20.9 percent (technically a bear market), with a staggering seven percent swing recorded on trades last Tuesday. As BGC Partners’ David Buik (one of the few really switched-on experts around) said, “I have been associated with markets for 49 years and I have never, ever, known such volatility.”

But as most City traders and politicians know, the real question is not how far up or down markets will swing, or whether gold will really hit $2,000, interesting as all that is — but this: how on earth do countries in the West have any hope of actually reducing their debt?

Three years ago, the US and Europe went in two different directions. President Obama tried to spend his way out of trouble, starting with a $780bn stimulus packages that so far has failed to stimulate.

Europe, particularly the UK coalition government, opted for the austerity road, with massive cuts in public spending. So far, the cuts have been so deep they have stifled growth.

So which is the right path to follow? Exactly a year ago, I put this question to Saudi Arabia’s Prince Alwaleed. He replied: “We have two schools of thought. Europe is going in the austerity path, US is going in the Keynesian approach whereby they say ‘spend your way out of recession’. Europe is tightening the belt. I can’t judge. There are two approaches. I can only wait until history decides.”

Unfortunately, recent history has already decided that both approaches have failed. Too much stimulus means too much debt. Too many cuts mean too little growth. It’s quite obvious isn’t it? The sort of basic economics that even kids sitting in a room playing pass the parcel would understand.

It’s time for the “adult” in the room of world leaders to stand up, take charge and come up with a plan that stimulates growth without seeing spiralling debt.

Anil Bhoyrul is the Editorial Director of Arabian Business.

For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.

Subscribe to our Newsletter

Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.