Debt Monetisation

This is a letter to the editor printed in the current Economist under the heading "A fourth way on debt":

"SIR - Your leader on debt reduction, which you admit is a  "painful process" that will "dominate the rich world's economies for years", focused on three policy options: austerity, exceptional growth and default ("Handle with care", July 9th).  But you overlooked a fourth option that is possibly the most realistic and constructive: debt monetisation.  Some of the world's richest economies, led by the United States, Japan and Britain, are probably so much in debt that no realistic growth scenario will be sufficient.  Nor will their fragmented democracies yield enough budgetary discipline.  A default seems unthinkable for any of these countries, thus growth and austerity could be, at best, only part of any solution.

There is another alternative for big economies that control their currencies.  They can simply print the money to pay off their debt (indeed, they already are doing so).  One important objection to such debt monetisation is that it leads to increases in a country's money supply, devaluing its currency and weakening consumer purchasing power.  But weak dollar-pound-and-yen policies will bring renewed export power to the rich economies as well as increasing consumer wealth in China and other creditor economies.

This is precisely the kind of rebalancing the global economy needs.  The over indebted rich countries will borrow less and consume less, while China and other underleveraged growth economies will lever up and consume more.

We in the rich world will have to pay some price for our decades of profligacy.  Alas, living with weaker currencies might not seem so objectionable, especially relative to the other alternatives, if it leads to strengthened economic performance and balanced sheets on sovereign debt."

Daniel Arbess
Partner
Perella Weinberg Partners
New York