Therefore, unless Spain can pull a rabbit out of the hat, it will likely be the first (of many) nations to reach what I call "The Krugman Moment"...
Despite my relentless criticisms of Monetary Policy and its role in subsidizing debt accumulation. The role of Keynesian (fiscal) policy in this economic fiasco can't be denied, specifically pertaining to this sovereign debt saga.
Economists constantly debate the maximum size of debt and deficit that can be sustained. They also debate the magnitude of the 'economic multiplier', as in how much economic 'growth' is produced by each extra dollar of debt. Economists such as Paul Krugman wishfully believe that the multiplier is greater than 1:1 and therefore debt creates economic growth. Austrian-oriented economists believe that the multiplier is less than 1:1 and therefore deficit spending by governments is a waste of money, because it produces less economic output than it uses.
Economists constantly debate the maximum size of debt and deficit that can be sustained. They also debate the magnitude of the 'economic multiplier', as in how much economic 'growth' is produced by each extra dollar of debt. Economists such as Paul Krugman wishfully believe that the multiplier is greater than 1:1 and therefore debt creates economic growth. Austrian-oriented economists believe that the multiplier is less than 1:1 and therefore deficit spending by governments is a waste of money, because it produces less economic output than it uses.
I am going to steer clear of these subjective debates, because there are more objective rules/criteria we can use to contain the Keynesian Monster:
1) Use it judiciously to buffer recession:
It was always a central tenet of Keynes' original policy that deficits were used during recession, not during expansion. In other words it was intended to be used as a economic stabilizer not as a means of augmenting one generation's income at the expense of another. The idea was that if an economy incurs fiscal deficits during recessions, and surpluses during expansion then theoretically it can keep its debt at a reasonable level. Strict discipline around that policy worked well in the post WWII decades, however, all of the major Western governments have broken this rule over the past 30 years.
2) Adjust GDP for Deficits
Economists need to adjust GDP for the amount of the deficit, which in their infinite duplicity, they have not been doing. For example, we don't need politicians borrowing 10% of the economy to claim a 2% economic growth rate. Any honest man would say we are still in (at least) an 8% recession.
3) No Ponzi Borrowing:
If a highly indebted government must incur a deficit during economic recession AND expansion just to prop up its economy enough to meet its debt service costs, then at that point, Keynesian Policy has failed and the country is bankrupt i.e. it's a Ponzi Borrower and its debts will growing inexorably larger over time.
That is the point that Greece, Spain and (soon to be recognized) all of the other developed nations have now reached.
Recognition of that tipping point can only be ignored and obfuscated for so long. Eventually of course, there comes that inevitable tipping point when borrowing costs grow out of control and lenders abandon the market. That manic moment when a nation finally realizes that they can't borrow their way out of a debt problem, I hereby dub 'The Krugman Moment'.
Recognition of that tipping point can only be ignored and obfuscated for so long. Eventually of course, there comes that inevitable tipping point when borrowing costs grow out of control and lenders abandon the market. That manic moment when a nation finally realizes that they can't borrow their way out of a debt problem, I hereby dub 'The Krugman Moment'.
