Arnab Das: We Are Caught in a Trap of Excessive Debt
Arnab Das, managing director of research and investment strategy at Roubini Global Economics, began his speech at the CFA Institute Middle East Investment Conference in Dubai, United Arab Emirates, by outlining a global debt crisis in which we are all caught in “this trap of excessive debt”.
Das argued that the most important parallel issues are the distribution between creditors and debtors and the balance between future and present economic activity. Central banks have sought a way out of the macroeconomic crisis by smoothing consumption through expanding public sector balance sheets. But debt, defined as spreading the cost of current investment over the future, has, as Ken Rogoff and Carmen Reinhart have pointed out, brought too much future activity to the present.
Creditor countries, such as Japan, Germany, China, and some Middle Eastern countries, are caught in the middle of this trap because their client states (countries they have lent money to) are so overleveraged. Yet money, Das says, is not the same thing as capital. Central banks have been “reflating assets as a way of maintaining wealth and mitigating liability problems,” but they are “unwilling to grapple with the fact that there is a liability problem because there is a redistributional problem.” This redistribution between creditors and debtors, between the present and future activity, has to be solved eventually.
Inflation is a key mechanism in this redistribution, but inflation is not about money alone: It is also about velocity and the multiplier. Das points out that over the financial crisis, the level of broad money has come down very sharply, along with velocity and the multiplier. Central banks have “smoothed out a drastic deleveraging that would otherwise have taken place,” Das said.