How Greek debt crisis could save America

May 24, 2010

It’s absurd. Uncle Sam is likely to run up an additional $11 trillion in debt over the next decade. But Washington only replies with minor budgetary tweaks. First, the Obama administration says it wants to freeze some domestic spending for three years. Then it creates a new healthcare entitlement program “paid for” through tax increases and unlikely spending cuts. Next up, the Obama administration creates a deficit reduction panel that not even its members think will work. And now the Obama administration wants new “rescission” authority to cut billions from congressional spending bills — excepts it’s “trillions” that are the problem. None of these measures favorably alters the budget’s perilous trajectory.

Little wonder that many observers think Washington will do nothing substantial about the exploding debt problem without some sort of financial market crisis. It is the bond market vigilantes that will come to the rescue and enforce fiscal discipline. Here is one scenario devised by the Committee for a Responsible Federal Budget:

Under this scenario, at some point financial markets or foreign lenders decide we are no longer a good credit risk, possibly due to debt affordability concerns. They conclude the United States cannot escape basic economic and financial “laws of gravity” forever. They stop buying our debt securities or demand dramatically higher interest rates due to increased perceived risk. With the sudden shift and large rise in interest rates, the economy goes into a severe recession. … Unlike the past two years, we cannot, however, borrow to stimulate the economy because the crisis was caused by excessive debt and lost confidence. … Creditors concerned with hyperinflation or even default will not buy U.S. debt.

Presumably, that would be the moment when Democrats unveil their “emergency fiscal plan” to calm markets through a massive value-added tax. It would be TARP all over again. But the costs would be many magnitudes higher. But I think the conventional political wisdom is deeply flawed. First, Americans intuitively understand that there is something deeply wrong about running trillion-dollar budget deficits as far as the eye can see. Maybe deficits didn’t politically matter in the 1980s, but debt as a share of GDP was only 50 percent. Now it is 60 percent only its way to 100 percent in a decade.

This is why we didn’t see a second trillion-dollar stimulus. Although plenty of liberal economists though it was needed, even congressional Democrats understood that Stimulus 2.0 would not fly with voters freaked  by all the red ink.

Second, America doesn’t need a domestic debt crisis. Voters can easily track the one happening with Greece and the EU. Runaway spending. Overpaid civil servants. A loss of confidence. Trillion-dollar bailouts. Falling standards of living. National decline.

That all adds up to a pretty compelling case for action in America. And Republicans (along with fiscally responsible Democrats) who want to see true spending reform — of the sort outlined in Rep. Paul Ryan’s Roadmap for America — would do well to frequently mention Greece on the campaign trail. Kind of a “don’t let this happen to us” sort of thing. They should also note that lower spending plus smart tax cuts to boost growth are the best recipe for restoring fiscal order — not massive tax increases which politicians will only divert to more spending.

6 comments

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One way to route public pensions by at least 50% would be a ten year surge in inflation — 1970′s style. More at:

http://wjmc.blogspot.com/2010/05/student -recently-remarked-to-me-that.html

By the way, inflation does not require a public referendum or Congressional vote — and inflation is easy to start…

Thank your for the opportunity to comment…

Posted by mckibbinusa | Report as abusive

Ryan’s plan falls far short.

An independent centrist for Congress in VA-6, I am finding people ready to vote even for a candidate who advocates raising Social Security retirement to age 70. There is no Dem running, and I am already flipping some of the Republican incumbent’s 62% from 2008.

No one in Congress offers how to balance the Federal budget even 30 years from now. My detailed interactive budget spreadsheet does it in four years (http://JeffVanke.com).

Posted by JeffVanke | Report as abusive

[...] James Pethokoukis, writing for Reuters says the “Greek debt crisis could save America” because the sad example of Greece may cause enough American politicians to have second thoughts about the wisdom of welfare states and rising deficits. Here the markets may not only be predicting events but actually changing future outcomes. Yet if financial responsibility were wisdom it is sagacity compelled on politicians by the voters. Left to themselves they wouldn’t give it a thought. Pethokoukis is certain that American politicians would gladly ignore the even the prospect of the collapse of US bonds but for the certainty that the voters would resist more heedless spending. Americans intuitively understand that there is something deeply wrong about running trillion-dollar budget deficits as far as the eye can see. Maybe deficits didn’t politically matter in the 1980s, but debt as a share of GDP was only 50 percent. Now it is 60 percent only its way to 100 percent in a decade. [...]

[...] This post was mentioned on Twitter by vannschaffner, Jim, Jim Cowart, Kathy, James Pethokoukis and others. James Pethokoukis said: my Reuters Breakingviews column: How the Greek debt crisis could save America http://tiny.cc/yabxs [...]

[...] (yet again) – How Greek debt crisis could save America (God, I hope [...]

[...] RELATED: How Greek Debt Crisis Could Save America, by James Pethokoukis. [...]

LEATHER Chairs

Everybody thought that main enemies for countries were those ready to begin a war against them, mainly in terms of guns and bombs, as common army interventions.

Latest events are showing us how in this new world order, the real menace for countries are speculators, finance speculators. 35 year old traders sitting on their City skyscrapers leather chairs, betting against CDS and Countries by just clicking some computer buttons.

George Soros achieved to force british pund to leave international change standards for a while by betting against it some time ago. So, all this happening now is not that new in the financial arenas.
But, what makes it so surprising is how the governments seem to do nothing to stop these attacks, no international call against leveraged positions against CDS, no international calls to brake exposure to currency speculation positions … no international call at all.

Greece had to be rescued by IMF last friday since its debt renewal climbed till astonishing levels, paying more than 8% per year for its sovereign issued debt, mainly due to CDS risk premium scalating non stop.
Now, Spain and Portugal seem to be next. But, are there enough reasons to attempt against these countries debt ???

Spain´s unemployment is at 20%. Obviously, an incredibly high level, but public deficit is well below United Kingdom´s, Italy´s, or even the USA. Do you imagine an speculative attack against the USA to force the americans to pay 8% for their T-Bond issues ??? … Probably not.

So, and only for those weak internationally imaged countries, the easy profits for bear speculators may arise more easily.

How can a government stop this attack once started ?? … Extremely difficult to say, but obviously, the first idea that seems more feasible would be that of sending signs to the international community that reforms to reduce public deficit are going to be undertaken seriously.

Not because these measures were extremely necessary to accomplish but just to stop artificial attacks from the international finance titans that get countries in real troubles to refinance its public debt, elevating the CDS or risk premiums to incredible sommets.

We are living in a world that wars do not get along the battle fields but in luxury meeting rooms, with fancy leather chairs, and many, many quotations running the bloomberg and reuters screens.

Wars fought by 35 year old traders, becoming billionaires attempting against countries by simply pressing computer buttons as playing video games.

Obviously, times have changed. At these times, Napoleon ( history´s most famous war strategist ) could not be that short any more, and obviously not that ugly. He should be more than 6 inches tall and look hot and sexy, necessary suited by Armani or Valentino,… and without any doubt, he would not be wearing that big hat or wear watches,… Instead, he would be wearing a ROLEX SUBMARINER bathed in gold.

Jose Luis Revilla Escudero
Chairman & CEO
WWShares, Inc
-Private Wealth Advisors-
http://www.worldwideshares.blogspot.com

Posted by WWS | Report as abusive

When will Jesus and his Magical Unicorns save us from our horribly flawed fiscal policies?

Posted by bryanX | Report as abusive

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