Wall Street is worrying about financing the PIGS (Portugal, Italy, Greece and Spain), and little wonder. Proposals to halt exploding public sector budget deficits in those countries already have the workers out in the streets in Athens and Madrid.
But we needn't look across the Atlantic to see a debt crisis in the making. The U.S. economy is sporting a record one-and-a-half trillion dollar budget deficit, and even Canada, after running a decade of budget surpluses, is posting its own largest deficit ever.
The fact of the matter is, wherever you go in the OECD, we're all PIGS now. That's because we mistook an energy shock for a financial crisis and bailed out everyone under the sun. But we are soon going to find out that today's bailouts are tomorrow's spending cuts.
The enormity of the government cutbacks that lie ahead is yet to be appreciated.
Simply winding down the stimulus is going to be a challenge in itself to the economic outlook, considering that virtually every major OECD economy is still on fiscal life-support right now. But actually paring those deficits down is a whole other matter. For the economy, it is tantamount to taking one's foot off a floored accelerator, suddenly slamming on the brakes, and then keeping them on at full force for years to come.
That day of reckoning is coming sooner than you might think. While government budgets these days are still trumpeting economic stimulus, finance departments are already quietly focusing on how to unwind it. And capital markets may compel them to do that a lot sooner than they had otherwise planned.
Central banks can print all the money they want, but the pairing of record high budget deficits and record low interest rates is a marriage that isn't going to last-bond issue after bond issue of government debt will see to that. And when that marriage ends, the cost of servicing that mountain of government debt is going to make the task of reining in those already record budget deficits all the more difficult.
Better do your borrowing before your government does its own. If you don't, you might not be able to afford what it will soon cost.
Our first run-in with triple-digit oil prices put us into the deepest recession of the postwar period, and has left us with record budget deficits.
What will our next encounter bring?