World Faces 'Sovereign DisCredit': Economists
CNBC EMEA Head of News
The global economy is facing a lost decade or a fully-fledged recession unless policy makers change their ways now, economists at Independent Strategy said.
David Roche and Bob McKee write in their new booked called 'Sovereign DisCredit' that the private and then public explosion of debt of the last decade has brought the global economy to the brink and claim tough decisions now need to be made.
The former Morgan Stanley economists claim the government response to the credit crisis has simply delayed the pain, which, when it comes, will be very sharp.
"Desperate to avoid a meltdown in global financial institutions and another Great Depression, governments have dramatically increased sovereign debt issuance to fund bank bailouts and provide fiscal stimulus to the real economy," they wrote.
"Monetary authorities have generated huge increases in liquidity to finance this debt. So instead of the private sector deleveraging, there has been a massive increase in public sector leverage, heaped on top of existing private sector debt," they added.
The book's conclusions on what this will mean over the next decade make uncomfortable reading.
Roche and McKee believe a 'New Monetarism' is on the cards, as sovereign debt competes with the private sector for global savings.
The best we can therefore hope for over the coming decade is a sharp rise in the cost of capital and a decade of sub-standard growth.
At worst, claim Roche and McKee, there is a serious risk of sovereign debt defaults that could plunge the world into a depression.
Failure to act now will mean the second, very scary outcome will become more likely.