The clamor to pay down “debt” is a politically convenient meme, but the fact is that until there is a genuine, strong recovery underway with major job gains and rising, real household income, the problem of the US debt isn’t a problem. Indeed, just the opposite: If Washington tries to clamp down on deficit spending now, it will throttle a weak recovery and send the economy reeling.

Nobel Prize winning economist Dr. Paul Krugman writes about this several times a week, both in his column and in his blog. I suggest the author of this misguided article read it.

While current debate has focused on the on the state of governments’ on–balance sheet debt, no attention has been paid to the more considerable and growing problem of their off–balance sheet debt.

In the UK, public-sector pension liabilities in isolation are estimated to amount to 80% of GDP, healthcare and general pension liabilities are in the order of another 200% of GDP to which needs to be added PPP projects, say another 20% of GDP. If current on–balance sheet debt is expected to rise to about 100% of GDP, off–balance sheet liabilities already amount to approximately 300% of GDP making 400% of on– and off– balance sheet obligations in total relative to GDP in the UK.

Germany, France, and Italy also have huge off–balance sheet liabilities and more severe demographic issues compared with the UK. Based upon my guestimations undertaken in 1996, Germany had at that time on– and off–balance sheet debt amounting to approximately 270% of GDP, France 320%, and Italy 370%, while the UK at that time had just 260%. Increased life expectancy and the financial crisis will now have added significantly to my original guestimates of government on– and off–balance sheet debt levels.

As stated in the article, the hard part of deleveraging may only just have begun but perhaps, it has not yet started.

This is consistent with everything I have read about economic recovery. (I highly recommend, “The Lords of Finance” by Ahamed.) This is why the Fed will keep the discount rate at 0.0 - 0.25% through 2010. That is the good news. The bad news is that the economy has far to go and deleveraging is slowed because governments have not found the way to get that money to businesses to grow the economy and create jobs. Too much of the money is instead used by investors to speculate in commodities and derivatives.

Will the effects of deleveraging stay confined only to the overleveraged countries? How will it affect countries like China that are still export centric? Chinese companies have a high volume/low profit margin model and many are supposed to be highly leveraged as well. If these companies experience lower volumes, it may affect their profitability in a significant way. This may in turn initiate a domino effect in the Chinese economy. In that scenario, we may experience further global recession. Will the central banks be forced to abandon their posture towards deleveraging in such a case?