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Trichet: Reducing debt is the great challenge for coming decade

By Neil Irwin

JACKSON, Wyo. -- Jean Claude Trichet, the president of the European Central Bank, delivered a lunchtime address Friday that lays down the gauntlet for how he thinks policymakers should grapple with the great overhang of debt and other long-term imbalances that haunt many of the world's major economies.

"The current debt problems in advanced economies did not start yesterday," Trichet told an audience of economists and central bankers at the Federal Reserve Bank of Kansas City's annual economic symposium, according to his written text. He noted that indebtedness by households, financial companies and governments all have soared over the last decades in many nations. This, he argues, was both the underlying cause of the crisis and presents the greatest challenge in trying to bring a return to prosperity.

"The key challenge for stability and growth over the coming decade is to ensure a progressive reduction in the debt overhang and the orderly restructuring and strengthening of the balance sheets of banks, households, firms, governments, and central banks," said Trichet, who leads monetary policy for the 17-nation eurozone and is, with Ben Bernanke, one of the world's two most powerful central bankers.
Trichet then explored some of the options for dealing with this debt overhang one by one.

Inflation would be one option; central banks could move to lower the value of their currencies, reducing the burden of debt. Trichet, a committed inflation hawk, not surprisingly rejected this option. That inflation would undo the hard-earned credibility of central banks, he argues, and ultimately make the world economy less stable.
The second option Trichet raised would be living with the debt, essentially re-inflating the debt bubble to try to ease the pain of the adjustment ahead. He rejects this notion as well.

"Some have suggested to ignore existing financial imbalances 'for the time being' and focus only on the short term," Trichet said. "Rather than pressing on with the deleveraging process, more spending could be encouraged to sustain growth in the short term. I believe that adopting this view would be very dangerous for our economies."

He presented the experience of Japan in the 1990s, when its economy stagnated, as an example of the hazards of not resolving excesses.

Trichet offers a third approach: Growing out of debt. Strong growth allows incomes to rise, and thus for individuals and firms alike to reduce their reliance on borrowed money. The question, of course, is how to achieve it.

"The enormous challenge for policymakers in the advanced economies is thus to set in motion this mutually reinforcing positive scenario of deleveraging and strong and sustainable growth," Trichet said.

His specific policy advice for how to achieve this will be no surprise to those who regularly follow Trichet. He advocates that governments adapt a cautious approach to fiscal policy and bring budget deficits down, an ongoing tension between Trichet and many American leaders, who argue for a more delayed return to fiscal restraint.
"Fiscal consolidation pushes the economy towards a durable recovery," he said.
And central banks should maintain their focus and credibility on keeping inflation low.

For institutions like the Fed, ECB, and Bank of England, "their role as anchors of stability is all the more important in times of deleveraging," Trichet said.

By Neil Irwin  |  August 27, 2010; 4:30 PM ET
Categories:  *Economic agenda  
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Comments

I think a good start would be to end our two wars in the Middle East that are being fought for unclear reasons and financed on credit.

Raise the tax rate on the highest earners back to what it was 40 years ago.

Put Single Payer Health Care back "on the table" for discussion and implementation.

Have those groups that raided the Social Security Trust Fund replace the cash.

Not good enough? Won't be any real economic turnaround until the economy improves (duh) - change economic policy to favor job creation in the U.S. There will be intense opposition to changing the current culture and status quo - do it for the children!

Posted by: shadowmagician | August 27, 2010 5:57 PM | Report abuse

When the only problem is excess debt, the solution is well established and relatively simple. It is called bankruptcy. Unfortunately, excessive and growing debt is only a symptom of our complex problems. Some of the major underlying threads include the changing place of the United States in the global economy, the industrialization of the world's most populous countries, the growing pressure of the world's lifestyle on the earth's resources, and the emergence of a post industrial world that will replace much if not most human labor with robots and possibly extend human lifetimes indefinitely.
For the moment, Japan possibly has a problem with debt that it can deal with on its own since it does not owe money to foreigners.
The EU has a problem where a number of countries owe more than they can pay in euros to largely German banks. This problem probably will end in some kind of bankruptcy restructuring.
The US has a large debt problem due to our trade deficit that is likely to be very difficult to resolve as long as the Chinese want to accumulate much of their wealth in dollars and chose to drive their economy by selling us goods for over valued dollars that they have no intention of using to buy goods and services from us.
Another US problem is the finances of many local governments. Like much of the private sector, those governments promised retirement benefits that are difficult to fund. But the governments have not been as quick as the private sector to abandon defined benefit pensions. Nor are they subject to the same bankruptcy laws that have restructured this kind of obligation for many companies that wound up in bankruptcy proceedings because of severe financial problems. One way or another some kind of bankruptcy process is going to have to be found to restructure this kind of debt.

Posted by: Anonymous | August 27, 2010 6:23 PM | Report abuse

WHY DID THE DEMOCRAT WASTE SO MUCH IN STIMULUS THAT DIDN'T WORK? IT'S TIME TO CUT BACK ALL THE GOVERNMENT BUREAUCRATS WHO SERVE NO USEFUL PURPOSE AND MAKE UNIONS ILLEGAL. AT LEAST MAKE THEIR PAY SCALE AND BENEFITS COMENSURATE WITH THE PRIVATE INDUSTRY. FORTUNATELY, THERE IS NO USELESS CLASS OF PRIVATE WORKER THOUGH.

Posted by: BIGMANONCAMPUS1 | August 27, 2010 6:38 PM | Report abuse

if the dems are in power, strengthening the economy will be the focus, along with helping the middle class and less well off. if the right is in power, expect war with iran and a replay of the bush years.

Posted by: Anonymous | August 27, 2010 7:33 PM | Report abuse

If everyone in this world knew where money came from, they'd realize that this reducing debt over the long term is IMPOSSIBLE without collapse of the banking system/financial system as it stands.

Almost all the money in the world represents someone's debt, and as debt is decreased, there is deflation.

On the one hand, we are fighting deflation, and on the other hand we are talking about reducing debt.

You cannot have both.

Posted by: Anonymous | August 27, 2010 8:53 PM | Report abuse

The solution is simple: DON'T LET REPUBLICANS GAIN CONTROL OF ANYTHING!

Problem solved.

Posted by: camera_eye_11 | August 27, 2010 10:10 PM | Report abuse

"Trichet offers a third approach: Growing out of debt. Strong growth allows incomes to rise, and thus for individuals and firms alike to reduce their reliance on borrowed money. The question, of course, is how to achieve it."
--------------------------------
The answer, of course, is JOBS.

Perhaps a reversal of the Neo-con and GOP economic policy of down-sizing, off-shoring, right-sizing and job elimination all for short term gain and management bonuses is in order. The policy that is "expanding" our economy these days.

Or perhaps, Paul Krugman has it right - he nailed Bernankes' remarks a week before Bernanke made them - perhaps what the U.S. needs is GOVERNMENT SPENDING! And not more taxpayer money going to Wall Street and the already rich.

Posted by: shadowmagician | August 27, 2010 10:27 PM | Report abuse

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Posted by: Anonymous | August 27, 2010 10:36 PM | Report abuse

What would help a lot on advancing an initiative to reduce government debt, in particular, would be to make a convincing case why it is imperative that we do so. We are headed for a fiscal implosion, and we need to make some difficult, yet necessary choices to avert an impending fiscal calamity. It's called sacrificing for the future.

Posted by: Anonymous | August 28, 2010 12:02 AM | Report abuse

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