Roubini Says Rising Sovereign Debt Leads to Inflation, Defaults
“The thing I worry about is the buildup of sovereign debt,” said Roubini
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If the problem isn’t addressed, he said, nations will either fail to meet obligations or experience higher inflation as officials “monetize” their debts, or print money to tackle the shortfalls.
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“While today markets are worried about Greece, Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems,”
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Greece “could eventually be forced to get out” of the 16- nation euro region, he said in a Bloomberg Television interview yesterday. That would lead to a decline in the euro and make it “less of a liquid currency,” he said. While a smaller euro zone “makes sense,” he said, “it could be very messy.”
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[Roubini supports] a carbon tax on gasoline, with Roubini saying it would reduce American dependence on oil from overseas, shrink the trade deficit and carbon emissions, and help pay down the U.S. budget deficit.
I agree that the damage done by those (which is nearly all of them) countries living beyond their means is significant. The USA and many countries in Europe and Asia (South Korea and China are two exceptions) have raised taxes on the future (by default – spending more than you have necessarily increases taxes later) to consume today. The strong emerging markets are another exception, many having learned their lessons and stopped spending money they didn’t have in the 1990’s.
However the richest countries have been spending money they don’t have for decades and the increase in government debt as a portion of GDP is an increasingly serious problem. It would be nice if the government of the rich countries could behave responsibly but it does not look like many of them have citizens who will elect honest and competent leaders. As long as they elect leaders that insist on raising taxes on the future (and lying to the populace by claiming they cut taxes – because they eliminate taxes today) those countries will pay severely for the irresponsible spending.
Saying you cut taxes when you just delay them is equivalent to saying I paid off my credit card bill when all I did was get 2 new credit cards, borrow all the money I owed on my original card, pay that one off, and then borrow more to increase my debt even more. Yes it is true I did pay off my original credit card, but that is hardly the salient point. My credit card debt increase. All that has happened in the USA since the Clinton administration had a balanced budget is politicians used a credit card thinking to lower taxes while necessarily increasing them in the future. You don’t reduce debt by spending money you don’t have.
Greece, Spain and Italy have practiced very irresponsible economic policies. But this is not much of a surprise. The Euro has some very good economic benefits but the weakness of irresponsible government spending while having a shared currency has been largely ignored (which has been very unwise). At least in the USA some people realize their kids have to pay the credit card bills being foisted upon them by the current crop of politicians and they don’t like it and try to reduce the abuse. When some countries, like Greece, seem to want Germany to pay their bills the incentive to elect honest and competent politicians seems to disappear. But Greece is just so small, even if they are many times as irresponsible as larger economies their problems are going to remain small, in comparison.
To me the biggest reason the US dollar has not declined more due to the huge debt is the other options are not much better. I can certainly understand why people have been seeking protection from inflation via gold and other commodities.
Related: The USA Economy Needs to Reduce Personal and Government Debt – Dollar Decline Due to Government Debt or Total Debt? – Estate Tax Repeal