Sovereign debt – A bubble destined to burst if it goes unchecked

Since the emergence of the nation-state concept became an indispensible part of our civilization, sovereign nations have been coming up with new tools to resolve economic crisis – one of them is to borrow and create money for the benefit of its citizens. Unlike an individual, a country can borrow and print as much money as it wants without getting bankrupt. Of course, in a democratic country, this borrowing and printing is done within a certain legal framework. But the fact is that borrowing and printing unlimited money is any nation’s monopoly power.
Modern states have found out that during a financial crisis, the easiest way to recover is to pump more money into the economy – and the way to do so is borrowing money by issuing bonds or just print money.
For example, since the economic crisis in 2008-09, the US government borrowed about $2 trillion (read TARP, Stimulus etc). Simultaneously, the Federal Reserve Bank (FED) created another $2 trillion. Actually, the FED doesn’t even print money anymore. It orders one of its affiliates – the New York Reserve bank most of the time – to type in a 1 and some zeros and hit print.
Other major countries did the same thing, including China, Japan, India, Russia, the United Kingdom, and the European Union nations. All these entities borrowed or created money to revamp their respective economies. When all was said and done, the sovereign nations of the world have borrowed and created more than $8 trillion worth of money during the financial meltdown in 2008-09.

Now here is the problem. Good is good as long as you don’t overdo it. It looks like a sovereign nation in the process of helping a bankrupt economy is getting bankrupt itself. The burden of debt and the excess creation of money from empty space are getting much too heavy.

In the name of solving the financial instability, we may end up creating more. Too much borrowing creates inflation and dependence – for instance, we owe over a trillion dollars to China. It weakens a nation’s fundamentals.

By default, a borrower is a weak negotiator. Of course, every nation is borrowing, so the world at large might be in dreadful shape. Readers, keep in mind: if the sovereign debt bursts for whatever reason, it may create a much worse financial crisis than the 2008-09 meltdown.

My worry is this. The so called sovereign debt bubble might become horrific if not addressed appropriately. So what’s the solution?

There could be an international standard which may be developed, preferably by G20, Or by world renowned nonbiased (if any exist) economists to provide guidelines to and for sovereign nations (based on the level of their economic development). My personal suggestion: for developed nations, the debt should be below 65% of the GNP and for emerging nations less than 50%. Creation of money should be temporary (2-5 yrs) and should not be more than 25% of the GNP at any given point in time. For the time being, all countries should try to reduce their debt load 25% by 2015.

If Western countries, particularly the USA, want to maintain their leadership in world finance and investment, they must control the debt.

While our borrowing record is not as bad as the West European and Japan, we are borrowing too much money from others to sustain our overindulgent lifestyle. It just doesn’t fit the equation. We might have to review our expenses and revenues from the federal budget. We simply can’t continue borrowing and manufacturing money.
It’s one thing for the investment in society (like building roads/infrastructure/research etc); but borrowing for regular and routine expenses will make us bankrupt. No, we can’t afford this fairy tale – we must be realistic.

Dr. Nasir Ahmed is a professor of public administration in the GSU Political Science Department.