World debt crisis: eight reasons you should care
As the world starts to focus on its debt crisis, Greece's financial woes may presage problems to come in Europe and the United States – with implications for your bank account and stock portfolio.
(Page 5 of 5)
"There is a contagion effect," says Mr. Parenteau, editor of the Richebächer Letter. Hedge funds, pensions, and professional investors, driven by the lure of profits, will bet against highly indebted European nations, one by one, driving up their borrowing costs until they pass credible austerity packages. "They've done Ireland already and Greece," he says. "When they're done picking the UK clean, they're coming over here. And once they're done with us, they'll probably go to Japan."Skip to next paragraph
Subscribe Today to the Monitor
The investor wolf pack, as he calls it, has to be resisted. Instead of cutting spending and raising taxes, he argues that governments should push pro-growth, full-employment policies. "If there's ever a time when you run a fiscal deficit, it's when you go into a deep recession.... No wonder the fiscal deficits blow out to 10 to 12 percent. That's what they're supposed to do" in times of recession.
If that means running up [budget] deficits to 17 percent of GDP, in a worst-case scenario, so be it, he says. "Instead of saluting to this religion of fiscal rectitude, they should go for growth."
Maybe so. But history doesn't necessarily validate that strategy: Over the past 200 years, periods of high debt have rarely been accompanied by periods of high growth, meaning it's difficult to grow your way out of a massive overdraft.
8. Because you'll be able to say 'i told you so.'
OK, this isn't a valid reason to pay attention to the world debt crisis. But it might make you feel good, or at least be a know-it-all at the monthly book club.
The fact is, all that has unfolded this decade – the housing bubble, the banking crisis, the stock market plunge, and now the prospect of governments defaulting on their debt – has happened before, over and over, in nations around the world. It has been a predictable narrative for more than 200 years, according to Reinhart's research.
During debt bubbles of the past, analysts and policymakers have always explained why this time was different: The system is stronger or the markets are smarter or the regulations are better. Each time, the bubble has burst and governments and consumers have had to relearn the dangers of too much debt.
If there is something different this time, it is the scale – how the debt crisis engulfs so many nations at once, Reinhart says. And they are the advanced economies rather than the emerging ones. The last time that happened was during the Great Depression.
"What began in the summer of 2007 is nothing less than a world crisis," she says. "We have been through a very tough part, but we still have tough times ahead.... There's no pretty way out."
The best thing you can do, experts say, is to address the problem early, before it becomes too acute. In the mid-1990s, Canada was facing big deficits and a yawning national debt. Scared by the Mexican peso crisis, it took dramatic steps to reduce the red ink, and today its economy looks relatively strong.
The lesson, in other words, is to avoid complacency. "What worries me always," says Reinhart "is that there is still this smug view that those things happen in Greece, but they can't happen here."
- Can the European Union survive the debt crisis?
- Germany: Europe's reluctant ATM
- Ireland: the hard path to austerity