Thursday, December 17, 2009


Sovereign Debt and Austerity Budgets

Governments are digging themselves deeper and deeper into debt, beating a dead horse in a bid to ramp up the economy and bring back the good times. Now even Germany has decided to embark on record borrowing to stave off the worst. National and local governments are slashing expenditures and introducing austerity budgets.

The second linked article notes, “By the end of 2009, global sovereign debt will hit almost $50 trillion.”

$50 trillion! And who will pay that back? Any realistic person knows the answer to that: nobody. Of course some of it will be paid back, but there’s a disaster in the making. So what if the EU bails out Greece? That wouldn’t make the debt go away. So far the US has been bailed out by China and Japan, but there are limits. Japan itself is in very dire straits (world’s second-highest debt-to-GDP ratio), and it’s anybody’s guess when the Chinese bubble pops. Same thing within the US: Even if the federal government bails out states, it doesn’t solve any problems in the long run. The Day of Reckoning will surely arrive.

Since the only two ways to deal with debt are paying it off or defaulting, and because paying off $50 trillion is clearly impossible, some big fish will be going belly-up.

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