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Crisis Spotting

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"Midlife Crisis" by Faith No More
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Is the sovereign debt situation in Europe really worthy of the  “crisis” label?  After all, we have been reading about the PIGS for years now (Portugal, Ireland, Greece and Spain) and there has been no collapse of currencies or European economic meltdown.  Should Americans and others outside the Eurozone lose sleep over the risks of so-called “contagion”, as if defaults would be akin to a communicable disease?  Can’t we just sit back and watch the Greeks and Germans hammer out another boring loan restructuring?

It’s only money….

Part of the problem with how these questions are viewed is that crises have largely degenerated into party political tugs-of-war.  On the left, a crisis is used to justify more prohibitions and rules.  On the right, a crisis is used to justify de-regulation and reduce government interference in the economy. It is now uncertain whether we can really recognize a true crisis anymore – or whether we even care.

So, as with beauty, a political crisis is often in the eye of the beholder.  Our acceptance of whether one truly exists can depend more on our general political outlook than on any agreed facts.  Climate change springs to mind as one example.

We also know that crises are used as a lever – or excuse – for bringing about radical and urgent change.  Shortly after he was appointed Chief of Staff to President Obama, Rahm Emanuel famously stated that, “A good crisis should never be wasted”.  The biggest government spending bill in United States history became law on the back of the 2008 financial crisis.  Restrictive and onerous financial regulations followed in the form of Dodd-Frank.  Meanwhile, the root cause of the problem – the lending practices of government-sponsored mortgage giants Fannie Mae and Freddie Mac – were exempted from the legislation.

Yet the world has moved on regardless.  Isn’t this what always happens when a crisis supposedly happens?  Sea levels never did rise dramatically despite Al Gore’s Nobel Prize-winning movie.  Economic depression didn’t occur in 2008 despite the collapse in the value of mortgage-backed securities and the under-capitalization of banks.  U.S. states like Illinois and California continue to operate despite their near bankruptcy.  The global economy trundles along.

And even if the debt crisis is a real crisis, what can we actually do about it?  In Athens, Greeks continue to go about their daily business as if nothing much will change, while their leaders’ making solemn agreements on public spending cuts.  Is it any surprise, then, that most people simply expect that this crisis will blow over like all those that went before?

To put it another way, after years of supposed crises, experience tells us to be skeptical when a new one arrives.  We are crisis-weary.  We simply don’t trust a crisis anymore like we used to.

Perhaps this helps to explain why many Americans remain unconcerned about the indebtedness of the United States government.   A $15 trillion debt is surreal, not only in terms of comprehending its size but also in terms of what it means.  Why not $20 trillion?  Why not $50 trillion?

Then again, you don’t have to be an economist to rationalize that somewhere out there is a limit to how much governments can borrow.  Otherwise, they all would have been spending at Obama rates and higher for decades.  The very idea of austerity measures would be something to giggle at.  The key question is whether developed nations are now reaching that limit.  Greece is Exhibit A.

After years of expanding welfare programs, Europe is finally bumping into the outer wall of the sovereign debt frontier.  The U.S. is firmly in the fast lane, trying to catch up.  It has expanded its debt by $5 trillion over the past three years alone – and that is before adding in the ObamaCare entitlement program.

Beyond public spending cuts in countries like Ireland, Portugal and the UK, the economic consequences of overspending have yet to be realized.  Free market economists predict a combination of inflation, economic stagnation, high unemployment, the loss of pension guarantees and a general contraction in social and welfare programs.  There will be calls for tax increases but it is well documented that there are limits to the amount of revenue that can be raised from taxation.

The end result, of course, is that people will be made poorer.  Whether or not you call this a crisis is up to you.

2 Comments add one

  1. Gavino says:

    Greece’s loss of sovereignty is astonishing to watch.

  2. Republi-chick says:

    Is it a crisis? For us not yet….in my opinion it will be a crisis when we have to stand in line for bread like the good old USSR. A big reason these countries are having some of their money issues is that the country pays for too much. If you make a decent living and you have 1 child there is little you need to compromise. If you then decide to have 10 more children, you suddenly cannot support that family. If a country is paying it’s “employees” a great income, then also supports people through social medicine, etc. it is only a matter of time before it can no longer support it’s children, and their children’s children, etc. Canada is going to follow in the footsteps of countries like Greece. If we keep it up we will jump on that sinking ship too. Ideally the world needs a clean sweep. Stop paying your employees who come in late and leave early….that doesn’t work in the private sector. Make some sort of limits or regulations on welfare funding from the government. If your government doesn’t have consequences for it’s spending….why would you. There are so many directions I want to go with this comment, but to stay on the topic of crisis….defined as: A time of intense difficulty, trouble, or danger. Well, the PIGS are in trouble….are we all in danger yet? I would say no when the biggest thing on the news right now is “Did Whitney die of a drug overdose?” Should we be scared? Yes, because we are not immune to this and we all need to think hard when we vote in November. The next 4 years could bring- “A time of intense difficulty, trouble, or danger.”