Facing a Never Ending Governmental Debt Crisis

As the federal debt ceiling scrum thrashes toward a short term solution, it's evident that we won't have a permanent solution for many months, maybe years. The Republican right made a mistake in thinking it could use the debt ceiling as a lever for reducing federal spending. The lever, it turns out, is one red hot tamale--not lifting the ceiling in time to prevent a government cash squeeze could blow up the stock and bond markets, slow economic and jobs growth, smack other nations with similar consequences, and worsen consumer malaise. The debt ceiling is like a nuclear weapon: too horrifying for actual use. So it doesn't provide much real leverage. Now, with time very tight, leaders of both parties are scrambling to stabilize an increasingly messy situation. Chances are they'll come up with something, but it will be short term, and the crisis will renew itself within months, if not weeks.

Across the pond, we have the same short termism managing an increasingly large load of governmental debt in the Euro zone. Greece's latest default spasm was quieted down with more borrowed money while a long term resolution was pushed off for a couple of months. The dominos in Ireland, Portugal, Spain and Italy quivered. High ranking EU officials debated what might be done without reaching agreement (sound familiar?). Banking officials in Europe applied extra lipstick to the latest round of bank stress tests, and admired the pigs as best they could. But the stink of the sty remained.

The sovereign debt problems on both sides of the Atlantic have taken on the quality of a sickening roller coaster ride, with crisis followed by crisis followed by crisis. Each crisis has the potential to blow up banks and sink financial systems, taking economies with it. With a frenzy of stress every few months, a toll on long term economic well-being will be extracted. You can't plan years ahead if your 401(k) is about to be torpedoed. A business can't hire for the future if its bank funding might evaporate in two months because a foreign nation 4,000 away can't get its national accounts straightened out. Just a few of the detrimental effects of such endemic crisis would include:

Lower business spending. It's well-known that corporate America is sitting on top of shiploads of cash, but not investing or hiring. While this reluctance to put money to work is due in significant part to overall economic sluggishness, the seasickness that comes from just watching the sovereign debt crises surely heightens cautiousness.

Less long term investment. The 2008 financial crisis drove large numbers of individual investors out of the stock markets. The sovereign debt dilemmas encourage further departures. With stocks still close to their two-year highs, it's easy to rationalize taking chips off the table, and some individual investors are doing just that.

More consumer malaise. If consumers keep hearing that the world as they know it will collapse in a couple of months, they won't: (a) buy a house, (b) buy a car, (c) buy household furnishings or equipment like washers and dryers, or (d) take a big vacation. Staycations devoted to buying bulk, discounted quantities of rice, beans, and ramen noodles will become all the rage.

Income stagnation, leading to economic stagnation. Incomes at almost all levels except the top 10 or so percent are stagnant. With federal deficits under scrutiny, governmental benefits may be trimmed. The continuing volatility created by these debt problems will only encourage the Federal Reserve to persist in its policy of never again allowing interest rates to rise. A future of low rates in America precludes a revival of the interest income on which millions of retirees and others used to depend. For an economy that's 70% consumption, income stagnation means economic stagnation. There's no possibility of growth if there's no income to spend. People aren't so crazy as to borrow money for consumption any more, nor are banks so crazy as to lend it. The inflation the Fed so desperate seeks won't spur consumption if there's no increased income to compensate for higher prices. Indeed, for most today, the response to inflation seems to be to stop spending on all but essentials.

A state of perpetual crisis precludes stabilization and growth. Today's sovereign debt crises are political problems more than anything else. Both Europe and America have the wealth to solve these problems. They just can't figure out how to allocate the burdens of the solutions. But the price of this political dysfunction is economic dysfunction. And that's our future, unless something really changes.