ALMOST eight years have elapsed since the financial crisis took hold in August 2007 and still the same issues are being fought over. Who should suffer the most pain—creditors or debtors? Is the best way to achieve growth short-term fiscal stimulus or long-term structural reform? And, in Europe in particular, how does one reconcile local democracy with international obligations?
Debt is a claim on future wealth: lenders expect to be paid back. The stock of debt accordingly tends to expand at moments of economic optimism. Borrowers hope that their incomes are set to rise, or that the assets they are buying with borrowed money will increase in price; lenders share that enthusiasm.
But if wealth does not rise sufficiently to justify the optimism, lenders will be disappointed. Debtors will default. This causes creditors to cut back on further lending, creating a liquidity problem even for solvent borrowers. Governments then step in, as they did in 2008 and 2009.
The best way of coping with too much debt is to spur growth. But developed countries, even America, have struggled to reproduce their pre-crisis growth...
from The Economist: Finance and economics http://ift.tt/1Hl4Qdv
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