How The Debt Crisis Will End
It became increasingly clear this month how the debt crisis will end - and it is not going to be comfortable.
The latest phony solution is for the large, "responsible" countries to demand more fiscal responsibility from the smaller and purportedly "less responsible" countries. In Europe, Germany's Angela Merkel and France's Nicolas Sarkozy are demanding that other European states give up some of their sovereignty and agree to strict limits on their deficit spending.
President Obama and Treasury Secretary Timothy F. Geithner, as well as British Prime Minister David Cameron, have been lecturing the European Union about being more fiscally responsible. How odd and hypocritical, based on their own behavior.
Given normal growth of roughly 3 percent, annual deficits of 3 percent or less tend not to be a problem. Small deficits tend not to increase the ratio of debt to gross domestic product (GDP) and debt service as a percent of GDP. That is why the annual deficit limit under the European Union Maastricht Treaty was set at 3 percent.
The table on the right shows the dismal record of the major countries when it comes to hitting the annual deficit target during the 13 years that the euro has been in existence.
Of the 17 eurozone countries, only Finland and Luxembourg have been in compliance all 13 years. The three biggest eurozone countries, Germany, France and Italy, have been out of compliance more years than they have been in compliance. The three big, democratic, non-eurozone countries, the United States, the United Kingdom and Japan, also have had dismal records in keeping their own deficits under the prudent 3 percent rule.
The simple fact is that most democracies are unable to police their own fiscal behavior, let alone the behavior of other countries.
Europe not only is sitting on a fiscal time bomb, which already is starting to explode, but also has a demographic time bomb with a rapidly aging population. Despite the fiscal crisis of the past few years, which is accelerating, most of Europe has done next to nothing to cut back entitlements to a manageable level, which is equally true of the United States.
Looking at the actions of the European leaders, rather than listening to their words, it is obvious that they increasingly are using the European Central Bank to buy the sovereign debt of their members after repeatedly saying they would not. [...]
Read the whole thing, to see the table of countries referred to, and to read the blunt but to-the-point summation of the article. While it's not what most people want to hear, it's none the less refreshing to hear someone being honest about what's really going on, and where it's going. But I would say the details of the "transition" it speaks of, and what comes after, is anyone's guess.
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