May 15, 2010

The Second Debt Storm Hits Nations - MarketWatch

The second debt storm hits nations - MarketWatch

U.S. voters can no longer ignore the dismal future for the United States as it continues to spend beyond its means. This piece from Marketwatch describes the massive problems faced by countries who have huge deficits and debt yet continue to spend excessively. The Obama administration and this Congress have not shown the courage to tackle this problem.

At bottom this is a leadership failure created by politicians pandering and catering to voters that government is the solution to their problems, whatever those problems may be. These pandering politicians have created a dependency culture that is clearly not sustainable. We have only to look to the recent Eurozone financial turmoil to see how quickly this house of debt cards can fall.

The Economist opines:
"Hardest of all will be finding the political will to curb profligacy. This struggle will become woven into the conflict that now tugs at the political fabric of Europe. German voters have just shown that they will punish leaders who spend their money bailing out feckless foreigners (see article). Hence the German demand that countries swallow savage budget cuts before they get any money—a demand that, taken to extremes, could condemn Europe to deflation and stagnation. On the other side, the violence in Greece is a reminder that democratic governments can impose only so much hardship before people rise up. Even if you accept that deficits must fall and economies must modernise, nobody can be completely sure which will come first, economic growth or social rebellion."

Fiscal restraint and spending discipline is long overdue in many developed countries and the United States is no exception. Our politicians, regardless of party, must refuse to continue their bad spending habits. This is not a new problem, but leadership for fiscal restraint rather than promises to voters that taxpayers and economies cannot afford must be the message to voters.

The U.S. mid-term elections will be an important test of our leaders' political courage. The leaders I want in office will deliver a message of spending restraint, fiscal discipline and deficit reduction and demonstrate the courage to actively reign in profligacy.

We simply cannot afford the spendthrift ways of Congress in the recent past. Congress, not the President, has the power to control spending and they have failed in that most important mission. They must change their ways because our national security is at risk.

"The debt mountain that brought down some of the world's biggest banks and dragged the international financial system to the brink of disaster has simply shifted to governments. Now it's threatening countries around the globe -- and, if left unchecked, could rip the very fabric of Europe's economic system and wreck economic recoveries in the U.S., China and Latin America."

Debt to GDP ratios in the world's advanced economies will top 100% in 2014, 35 percentage points higher than where they stood before the financial crisis, the IMF estimated last month.

Three percentage points of this increase came from government bailouts of financial institutions, while 3.5 percentage points was from fiscal stimulus. Another four percentage points has been driven by higher interest on government debt and 9 points came from revenue lost from the global recession, according to the IMF.

"Public finances in the majority of advanced industrial countries are in a worse state today than at any time since the industrial revolution, except for wartime episodes and their immediate aftermath," Willem Buiter, chief economist at Citigroup Inc. and former member of the Bank of England's Monetary Policy Committee, wrote in a recent note on sovereign risk.

"Unless there is a radical change of course by those in charge of fiscal policy in the U.S., Japan and the U.K., these countries' sovereigns too will, sooner (in the case of the U.K.) or later (in the case of Japan and the U.S.) be at risk of being tested by the markets," Buiter said."

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