The Government Debt Problem

I've been thinking about the public debt problem lately. Is the problem really a non problem or at minimum a problem of creeping gradualism, as many Keynesians seem to argue? Or is the problem acute: the next big bubble to burst, as argued lately by Doug Noland in various posts on at Credit Bubble Bulletin, most recently Tuesday April 27, 2010. A snip:

From my analytical perspective, the system has found its way into another "terminal phase" of excess – this time emanating from the Global Government Finance Bubble. Intoxicated yet again by the effects of loose “money,” the bulls see (inflating) markets as confirmation of sound system underpinnings. I, in contrast, see another policy-induced absolute mess in the pricing and distribution of finance throughout the entire system. As always, calling the timing of a Bubble’s demise is a perilous proposition. But I can sure see the makings of acute systemic fragilities.

Today, while wading through too many emails, I found a nice little tidbit from Bill Bonner, which should give us pause. Of course it won't give any pause to those who we might libel "inflationists". To Bonner, US Deficit Spending and Why Governments CAN Go Broke, The Daily Reckoning, April 30:

The private sector is de-leveraging...as near as we can tell. Private businesses cut their payrolls. They trimmed expenses. They protected their profit margins - generally.

But the public sector figures it has a different role to play...a countercyclical role. While the private sector eases off, the public sector puts the pedal to the metal.

That's been the story for the last year and a half. The government pays more. Hires more. And floats deeper in the water.

Walter Wriston once commented that the "government can't go broke." But that just shows you why the banking sector is in such trouble; Wriston ran Citibank…

The trouble with most people in economics and finance these days is that they study too much math and not enough history. If they read more history they'd know that governments go broke all the time. They'd probably get a hint about why governments go broke too - they pay too much; hire too many people; give away too much money on bread and circuses; and they get involved in too many costly foreign wars.

What's new?

Nothing really. But the fab finance is an innovation. Now, with the debt spread among so many unaware debtors…we can all go broke in a much bigger way. [Hyperlink added]

So, we will all watch as first Greece, then Spain, then the other PIIGS (and the rest of Euro-land) try to find a way out of the mess. And we'll watch later as the US tries to deal with California and about 5 other states, along with a bunch of big cities who are also in one hell of a fiscal mess.

For those like me who may have thought that their federal pensions were a safety net, we might want to think again! [Note: I never thought that I would get to keep all my federal pension benefits. I heard/read about the Great Depression, Native American "treaties" with the US Government, etc. long ago and realize that promises are the stuff of words. The link between word and deed is always and everywhere tenuous.]

Comments

[bailey]

I believe the trend started 30 years ago. A also believe in the not to distant future the Supremes will opine gov't. employee contract benefits are limited to the term of the contract.

[Jeff from Silver Coast Finest]

That is part of the reason why the state, cities, counties and school boards are agonizing over how to bring their budgets in line with reduced tax revenues. Those budgets bear the pressure of salary scales for government workers that exceed those of the average private-sector worker/taxpayer.