The Race to Insolvency

Looks like the United States will have plenty of competitors in the race to fiscal insolvency. According to the European Commission’s May forecasts, public debt in the eurozone will soar to 77.7 per cent of GDP this year and 83.8 per cent in 2010, reports the Financial Times.

Barring remedial action by European governments, says Laurence Boone, economist at Barclays Capital, eurozone public debt will zoom to 105 per cent of GDP by 2015. Greece’s debt will be 149 per cent, Ireland’s 144 per cent, Spain’s 135 per cent and France’s 106 per cent.

Why should Virginians care? The eurozone’s economy is a bit larger than that of the U.S. If the 16 nations of the European Union borrow as heavily as the U.S. is projected to do in the years ahead, there is a very real threat that the public sector will crowd out private sector borrowing on a global scale. And that will set into motion a wealth-destroying cycle: Higher interest rates = lower economic growth = lower tax receipts = higher deficits = higher interest rates, and so on.

It’s going to get ugly. Only the solvent will survive.

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22 responses to “The Race to Insolvency”

  1. Jim:

    I generally agree with your post. However, to be fair, the deficits and public borrowing have been going on for a while in the US and EU without spaking an inflationary forest fire. What creates the "tipping point" that send inflation spiraling upwards?

    The once loved, now maligned Alan Greenspan belived that central banks had become sophisticated enough to control inflation with "computer aided monetary policy" (my phrase, not his). Maybe he's right.

  2. Gooze Views Avatar
    Gooze Views

    I have to agree with Groveton here. Deficit spending has been around for decades. Don't forget that Ronald Reagan, despite his litle government rhetoric, was one of the biggest Keynesian spenders around while Bill Clinton, accused by wing nuts of being a wild liberal, actually cut the deficit and had a balanced budget.
    Aside from the 87 stock market crash, the 80s under Reagan were good economically and the 90s were as well under Clinton.
    I think you need to make a better link between "solvency" as being the only way to survive and these two contrarian points I have just raised. You can have high deficits and a booming economy. In fact, as FDR showed, deficit spending for the New Deal and World War II actually got us out of our worst downturn. I know that many economists such as Amity Shlaes, don't believe that, but I think you need to push your argument farther than just chanting the mantra that spending is always bad. T'ain't necessarily so.
    Peter Galuszka

  3. James A. Bacon Avatar
    James A. Bacon

    Peter and Groveton, You are quite correct, deficit spending has been around for a very long time. There's a very big difference between now and then (the Reagan era that Peter alludes to) and way back then (World War II).

    Back in the Reagan era, the debt as a *percentage of GDP* peaked somewhere between 60% and 70% before dipping lower during Clinton and resuming its climb under Bush II. Debt as a percentage of GDP today is roughly 80% of GDP, and is heading north with no end in sight. By the Obama administration's own reckoning, we will amass another $9 trillion in deficits over the next 10 years, and debt as a percentage of GDP will surpass 100% of GDP, putting us in uncharted territory.

    Admittedly, debt as a percentage of GDP was even higher in the aftermath of World War II. The big difference is that World War II ended, and debt levels plummeted. Deficit spending in the United States is not ending. Indeed, the political pressures are intense to *add* to entitlement programs, not trim them back. If Obamacare passes, we can add another $1 trillion to the deficit over the next 10 years (and if the past performance of government programs is any precedent, the cumulative deficit will be far higher).

    Of course, deficits can have short-term stimulative effects. If spending weren't out of control, deficit spending by government can be a useful way to stabilize the booms and busts of the business cycle. But deficits that just ratcher higher year after year, regardless of what happens in the business cycle, are themselves destabilizing. You wait and see!

  4. James A. Bacon Avatar
    James A. Bacon

    As for changing the mantra that "spending is always bad," that's not an accurate characterization of what I believe. It all depends on what the government-accumulated debt is spent on. If the money is spent on education, infrastructure and scientific research, it adds to the productive capacity of the economy and may (not necessarily, but it may) be a net positive.

    Contrarily, money spent on roads to nowhere, agricultural subsidies, corporate welfare, cash for clunkers, and the like generally does not add to the productive capacity of the economy. Tapping out the national line of credit to re-elect incumbent congressmen will bring only woe.

  5. ….so deficits are okay if they go for good stuff?

    I know I misunderstood this…

    that's essentially what Cheney said ..right?

  6. James A. Bacon Avatar
    James A. Bacon

    Larry, I'd put it a little differently. I'd say that deficits are "less bad" if they go for good stuff.

  7. Here's a picture of inflation in Greece:

    Here's Ireland:

    I guarantee you that we can make a whole pile of money if we can figure out the inflation vs. deflation riddle in the US. I was a card carrying member of the "deficits cause inflation" camp until recently. I am still leaning that way but I'd like to see one of these "sky high deficit countires" actually experience some serious inflation.

    How does Ireland have 144% of GDP in defecits and only 3 – 5% inflation? Maybe you have to count the Eurozone as a whole because of the common currency. And maybe the whole isn't that bad when you add in countries like Germany.

    Speaking of Ireland, whatever happened to the Celtic Tiger?

    The Economist magazine rated Ireland as the best place to live in the world in 2005 (quality of life index). Now, the GDP is shringing 10% per year and unemployment is over 12%.

    And you guys wonder why I put so little stock in one magazine or another declaring Virginia to be "America's Best Run State".

  8. " How does Ireland have 144% of GDP in defecits and only 3 – 5% inflation?"

    now that would make an interesting comparative country chart.

    and the point about inflation on a per country basis within the EU.

    what would cause that?

    they must still have some "soft" import/export rules between countries.

  9. Gooze Views Avatar
    Gooze Views

    I think you are confusing things.
    Keynes used to talk about 'pump priming' or using temporary infusions of public money to kick start economic growth. That's what the cash for clunkers program was temporary and emphasize temporary influsion of tax dollars to get consumers to spend which is what we badly need them to do if we are going to get out of this recession..
    The way you have this set up is wrong when you state: "Contrarily, money spent on roads to nowhere, agricultural subsidies, corporate welfare, cash for clunkers, and the like generally does not add to the productive capacity of the economy."

    Another type of spending that you confuse is infrastructure spending. Eisenhower spent billions on the Interstate highway system. Maybe some were "roads to nowhere" but it was a fanstastically useful investment in terms of boosting U.S. economic growth. Only the government could do this; private money and "public private partnerships" could not.

    Corporate welfare, I guess, is the "W" admininstration letting troubled banks spend billions in TARP money for bonuses. Right? Otherwise big money and perks are really the realm of your beloved private sector and the LACK of government oversight. Boards of directors voted these unspeakable huge remunerations, not Congress.

    $1 trillion for Obamacare? On which proposal? Funny but the same argument you seem to be making was the exact same one my conservative father made against Medicare back in the 1960s. Well, guess what? It has been very expensive. It has future funding issues just as Social Security did (and my conservative grandfather was against that one, too). But both have been enormously successful in helping the great mas of Americans. By the way, you never address what should be done about the huge and chronic increases in private health insurance that the blessed private, for -profit sector has given us.
    This is why this anti- deficit exercise of yours is getting so lame.You sound like a fundamentalist preacher who always sees things in absolute black and white moral terms. You need a more sophisticated world view that admits that the private sector cannot always serve everyone well in society. Government spending is needed. It's be around for years and always will be here. Get over it.

    Peter Galuszka

  10. I have a more simple view and that is if the money ends up providing jobs for ordinary people, even if on a temporary basis – and as opposed to what Darrell posted – the money ends up in a financial enterprise which will fatten – already fattened and relatively unscathed by the meltdown – courtesy of taxpayer bailouts.

    I think Obama struck the tone yesterday… with his speech but also with his message to the Chinese – that he is going to defend the American worker as opposed to siding with those who would suck this country dry and walk away ….

    In this context – I have a very hard time with the standard Republican "hands off the private sector" philosophy.

    I hear virtually nothing from the Republicans these days reassuring on how we should go forward – most seem to be saying that the past year was an "unfortunate" incident that is just one of those things that happens every now and then with a capitalistic system.

    ….so we move on…

    I'm not buying it and I don't think many others are either.

    The Republicans are AWOL from how to fix this problem. They're in total denial as a political party.

    their main 'contribution' ?

    "socialism is not the answer and economic Armageddon is on the horizon ".

    right.. okay.. we got that message and we agree with it

    Now, how do we go forward?

    Where is the Republican leadership?

  11. I was AGREEING with what Darrell posted.. I think I mucked up how I said it.

  12. Another interesting article on the inflation vs. deflation question. This article take the "deflation is coming" tone. Interesting that the credit has dried up over the last 3 months. I am also continuing to hear a lot of worries about the amount of bad commercial real estate loans on the books of many banks. Hmmm…. Maybe we aren't out of the wodds just yet.

    How long does Obama have to be president before the economy is his responsibility?

  13. Anonymous Avatar

    The Republicans are AWOL from how to fix this problem. They're in total denial as a political party.

    And they are increasingly seen as grumpy naysayers devoid of any idea that hasn't been used.


    How long does Obama have to be president before the economy is his responsibility?

    I think we have pretty much seen that the economy of every president is the responsibility of the one before. And that is not just placing the blame, I think it actually takes that long before a presdents actions filter through the system and wind up saddling the next president.

    So if you want to place balme for some period of performance, look at the previous president.



  14. I'm not that much concerned about who caused this mess ….until … it gets blamed on a 8-month presidency – even as many – depending on their political loyalties and current circumstances will blame in on the "other" party.

    Obama did the TARP and the bailouts and the stimulus based on the advice he was getting which was very much like the advice the prior administration was given.

    People simply do not believe that they are justified and they're entitled to their opinion sure enough but none of this is what this President offered or promised to do .. he really did parachute into it.

    What we can legitimately blame him for is for having what appears to be an arrogant attitude that he could implement his agenda in the middle of the rest of this mess and it's turned out to be way too much for what the average person can feel comfortable with.

    But the problem is – if he does not do …something.. we know things are going to get far, far worse.

    And Grovteon.. you are correct. There are major concerns that there is still a lot of "bad paper" "out there" and I'm sure someone will blame that on this President also..

    so a question to ya'll:

    do ya'll think that if Bush were still in or McCain would be handling this mess any better?


    We know this. Bush and McCain both would probably have the good sense not to mess with the health care issue but I'm just not sure what they'd be doing.

    If McCain had refused the auto and bank bailouts and the stimulus ..would he have ended up the modern-day Hoover?

  15. Another point of view:

    LarryG will like the reference to a "W shaped recession".

  16. yes… there is a school of thought that if the stimulus is insufficient that we won't be able to climb the wave and we'll slide back into a recession or worse into the abyss.

    scary stuff.

    what would be worse?

    "insolvency" with or without a recession/depression?

    I'm sure Bacon will whip up that gloom & doom scenario soon.

  17. well these two NoVa candidates for local office don't look "insolvent":

    $473,473 Herrity for Fairfax County Board Chair

    $424,635 Bulova for Fairfax County Board Chair –

    geeze TMT where do these guys get this kind of money?

    no directly from developers

    $33,572 Republican Party –
    $25,000 McDonnell for Governor

    my question – can developers/others give money to the RP and then have them give it to the candidate?

    why would McDonnell give from his own campaign to a local BOS candidate?

  18. LarryG

    Jim Bacon has often defended Virginia's unlimited campaign contribution law. He says it's better than the PACs that pervade the federal system. But I see endless ambiguous groups contributing to Virginia politicians. I don't know if you can unwravel these "group donations". If not, how are they better than PACs?

  19. If Virginia allows someone in NoVa to donate 25K to the state level of a political party who then will turn around and pass that donation back to the local level…effectively masking the identity of the donor…

    then it's just another example of how polluted our elections are and trying to pick this variant as worse or better than a PAC variant is like trying to choose which of the two piles of dog poop are superior.

  20. Anonymous Avatar

    "I was a card carrying member of the "deficits cause inflation" camp until recently. I am still leaning that way but I'd like to see one of these "sky high deficit countires" actually experience some serious inflation."

    Good Lord, someone on Bacon's Rebellion wlling to chane his mind in the face of evidence.


  21. Anonymous Avatar

    This might sound crazy, but how about giving employers and workers
    actual, significant tax breaks and other incentives for either finding a job within 5 min. of their home or moving to within 5 min of their job?
    This might actually stimulate segments of the economy. A small step forward is at least a step.

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