The penny is starting to drop, albeit still buoyed in the air by economic flatulence. Good article by Martin Wolf in the FT and follow-up by Felix Salmon. The case-study put forward is Spain which appears to be heading for the same precipice that Greece is standing on, which only has public debt of 56% of GDP; whereas its private debt is 176% of GDP.

Apparently the 200,000 page; (or so) Maastricht Treaty, which brought to the world the joys of a completely new vocabulary, words like “synchronicity”, capped public sector budget deficits at 3% of GDP and public debt at 60%... However, that’s not really what went wrong. What went wrong was that it said nothing about private sector debt.

As if there was or is a wall between the public sector and the private sector, like they exist in two separate universes and the private sector as a whole can run a budget deficit (that’s when you get in less money than you spend), as big as it wants, and balloon up its debt, and that’s OK.

Sure-- it’s OK in the short-term, if the private sector is borrowing like crazy to party-party-party, that drives GDP, drinking champagne and snorting Johnson’s Baby Powder up your nose (that’s what Kate Moss said it was), as you drive your Hummer down the freeway at three miles to the gallon. All this increases GDP, and so tax revenues go up, and everyone lives happily ever-after (until the money runs out).

Look at how much debt got piled on in America over the past few years, and where:


Source

It wasn’t the National Debt that exploded, it was “private” sector debt, and all that’s really happening now is that the private sector debt is leaking across to the public sector via the bailouts.

All those crisp new US Treasuries that are being sold are not being used to build bridges to nowhere (or underpasses for turtles), or to go and fight wars in far-off places where there are promises of “spoils” to be carried home in the future (in the olden days they would go to war to capture dancing-girls, and gold...these days it’s for “principles”, and heroin.

Nope it’s not to build new sewage treatment plants in Tennessee either, or to conquer the moon…it’s to help pay…

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