Roubini: Greece debt crisis is only the tip of the iceberg
The Greece debt crisis should be a warning. History shows that unless this buildup of sovereign debt is tackled eventually by raising taxes and controlling spending, then there are only two outcomes: default or high inflation.
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While the markets these days are worrying about Greece, it is only the tip of the iceberg, or the canary in the coal mine of a much broader range of fiscal crises. Today it is Greece. Tomorrow it will be Spain, Portugal, Ireland, and Iceland. Sooner or later Japan and the US will be at the core of the problem, shaking the global economy.Skip to next paragraph
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We need to recognize that we are in the next stage of financial crisis. The coming issue is not private-sector liabilities, but pubic-sector liabilities.
Revived economic growth alone will not generate enough tax revenue to relieve this sovereign debt crisis. Fiscal deficits are huge and structural. They are not due solely to a cyclical downturn in growth but to long-term commitments such as pensions, Social Security and health care. To avoid default or high inflation, the advanced economies will require some combination of raising revenues through taxes and cutting government spending.
In Europe, where tax rates are already very high, the right adjustment is cutting spending instead of raising taxes further. In the US, the average tax burden as a share of GDP is much lower than in other advanced economies. The right adjustment for the US would be to phase in revenue increases gradually over time so that you don’t kill the recovery while controlling the growth of government spending.
What worries me most is the political gridlock in Washington. While everyone agrees that $10 trillion deficits (by the Obama administration’s own estimates) for the next decade are not sustainable, there is no political will to act. The two parties are completely divided. Effectively, the Republicans are against any form of revenue increases. The Democrats are against spending cuts, especially of entitlements.
If the Republicans take control of the House of Representatives in the next election and refuse any revenue increases while the Democrats veto spending cuts, the path of least resistance will be runaway fiscal deficits that will then be monetized by the Federal Reserve, which has already embarked on this path. In just the last year alone, the Federal Reserve has bought $1.8 trillion of Treasury securities and agency debt, a course that will inevitably lead to high inflation if sustained. It is what is popularly known as printing money.
In Greece [with yields higher than 12 percent on two-year bonds ] or Spain or Portugal, the bond markets are forcing an adjustment. In spite of the recession, the markets are telling them to either straighten out their problems or go bankrupt.
Unfortunately, there is no such adjustment being forced upon Washington at the moment because the bond market has not woken up to the dangers ahead. You can borrow at a zero percent rate on the short end and 3.6 percent on the long end. As a result, the political system is going to resist fiscal consolidation. This means the risk of something serious happening in the US in the next two or three years is significant.