Debt financing unlikely to save Western economies

The Dow Jones industrial average tumbled more than 500 points Thursday, exposing the plight of western economies and their deep structural defects, notably a heavy dependence on debt financing.

Two factors contribute to the panic in the stock exchange: market concerns over a lasting depression and the struggling U.S. economy, and uneasiness about the possible impact of the sovereign debt issues in nations such as Italy and Spain on the world economy.

Investors are rightly pessimistic about the prospects of the U.S. economy. The United States has long been maintaining economic growth and excessive consumption by means of debt financing, hence masses of economic bubbles, which eventually triggered the financial crisis.

Weak consumer demand leads to a slowdown in economic growth. And the only way the Americans have come up with to improve economic growth has been to take on new loans to repay the old ones. "To eat May's grain in April," however, will never be a permanent solution to a problem.

Chances are slim that the Congress-mandated debt ceiling will be further raised. And, even if it is, lack of momentum for economic growth will bring the risk of debt default back again. Under such circumstances, how can the market calm down? As a matter of fact, the New York Stock Exchange bared its teeth before the ink had dried on the debt ceiling bill.

Some European countries, plagued with sovereign debt issues, are now resorting to debt financing from the market as well as international organizations. It is admittedly an expedient, but definitely not an ultimate solution.

The European Union (EU) has noted the key factor behind sovereign debt issues is that some of its members recklessly ran up debts to retain their national welfare. In contrast with a rise in welfare and costs, efficiency and competitiveness are on the decline. The current bailouts offered by international bodies such as the EU are, in a sense, to "rob Peter to pay Paul."

As big economies, the United States and the EU wield an enormous influence on and shoulder a great responsibility for the world economy. Faced with a series of debt crises, they need to reflect on their economic and social development modes and take concrete steps to help solve the "imbalance" problem of the world economy.

Only by introducing reform can they save themselves; only with a sound economic structure can they assume responsibility for the world economy.

[Source: Xinhua, Beijing, 05Aug11]

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