The age of easy credit and its aftermath: Is there life after debt? | The Economist

A rich world with less debt would look very different. Banks are already facing demands for higher capital ratios (and thus safer balance-sheets). Western consumers, facing higher taxes and lower benefits, will no longer have the freedom to spend; indeed, they will want to save more as they face long retirements. Sarah Jessica Parker and her Manolo Blahniks will be out; Grandma Walton and her sensible apron will be in. Houses will once again be somewhere to live, not vehicles for speculation. Some business models, notably private equity, will find it tougher to thrive. Life will be harder for entrepreneurs: more than half of all new firms rely on debt finance. For policymakers, the priorities are clear. First, they need to focus on generating growth. America, with its relatively young, rising population, will find that comparatively easy. Continental Europe, by contrast, runs the risk of ending up like Japan, which has spent two decades struggling to grow in the face of its debt burden and ageing population. The best and the brightest young Europeans may emigrate to countries without such burdens; and if the economy stagnates, those that remain may eventually decide either to default on their debts, or to cut benefits to the elderly. Faced with those dangers, Europe needs to embrace the structural reforms necessary to make its economies as fast-growing and flexible as possible. Second, policymakers need to begin the long task of rebalancing the world economy. It makes sense for Western countries, like workers in their 50s, to save for retirement rather than run up their credit-card bills. But if one lot of people saves, another must borrow. At the moment the developing world is unwilling to run current-account deficits; even getting China to save less is a huge task (see article). All the same, a shift is in everybody's long-term interest—and the younger parts of the world should be the borrowers. Weaning rich countries off their debt addiction will cause withdrawal symptoms. Austerity does not appeal to voters, who may work off their frustrations on politicians and (worse) foreigners. Mr Micawber's phrase may be turned on its head again. When annual income is forced to exceed annual expenditure, the result may well be misery.
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