They've bought enough rope

The Financial Times has an interesting article on the Greek Crisis and how it's coming to America. It's worth a read and I'd encourage you to Check it out. The following though reminded me of an historical quote:

the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $1,500bn, that implies up to $300bn of extra interest payments – and you get up there pretty quickly with the average maturity of the debt now below 50 months.

Know which quote I'm talking about? It's from Lenin. The Capitalist will sell us the rope with which we will hang them. As for the Chinese, well we know about our delicate relationship with them.

The article argues, almost convincingly, that the Keynesian free lunch does not really exist.

Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect

I said almost because what Mr. Ferguson fails to mention, and sadly probably on purpose, is that we've been deficit spending for the better part of the last decade. It's called two unfunded wars - which by the way is a foreign investment like international aide if you will... where you give and get nothing in return, the largest (unfunded) entitlement expansion since Medicare - which did nothing to actually address any real costs associated with senior medical care or the price of drugs. It was in fact a give away to the insurance industry. Oh yes and who can forget the tax breaks to correspond with these spending increases... hello!!! Spending increases, not cuts!! You cut taxes you cut spending there's a correlation folks.

$757 billion, the majority of which has yet to still be spent, is still a drop in the bucket compared to the profligate - orgiastic spending spree this country has been on for the last decade.

If we learned anything from OJ Simpson it's that you've got to believe the lie and it must become your truth, so it obviously is for Mr. Fergusun, who's no stranger to revisionism, and his framing of the current mess the world is in. Why after all, they say, should you let the truth come in the way of your smear.

But false premise aside the conclusion that Mr. Fergusun draws is for the most part right.

Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted – as is the case in most western economies, not least the US.

This administration, unlike the last, shouldn't and can't afford to blithely believe that GDP will continue to grow at a pace constant with inflation. The fear of the Great Recession was real. The damaging spending that we've inflicted this past decade, along with the fear created by the recession has raised real interest rates and growth will probably be lower than expected.

We'll end with Mr. Fergusun who notes,

On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic.