The cause of the current worldwide economic malaise can be traced to Asia’s “Saving Glut,” and how it impacted East-West trade. Over the past decade, emerging powers stockpiled $10 trillion of foreign reserves, i.e., bonds, which flooded the global market. That set off a series of events that led to miniscule interest rates and historic deficits by Western countries.
Other factors were at play as well, such as excess manufacturing capacity. So when debtors slashed spending, it became apparent that there was too much saving and too little consumption in the world to support growth and produce more jobs. The same trend was seen in the 1930s.
How to deal with the massive debt now weighing down so many nations will be the central political debate of the next decade. Do countries write it off or default?