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Über dieses Buch

The Public Debt Problem explains the nature, sources, and extent of the sovereign debt problem, and analyzes its potential solutions.



Chapter 1. The Genie Out of the Bottle

Just as one can practice safe sex, there used to be a way to do safe finance by holding safe assets. In its most general sense, an asset is anything that allows one to obtain goods and services in the future. In normal times, cash—actual dollar bills and coins—is the safest of all assets: you put it under your mattress and retrieve it when you need to buy something. The problem is that you don’t get any interest or other return on cash hoardings. It is better to put your money in the bank and earn some interest. Cash in the bank is pretty safe, especially since the federal government’s deposit insurance scheme protects you against bank failures. In times of inf lation, of course, cash ceases to be safe, for its value diminishes as the prices of goods and services rise, but this problem can be ignored in normal times.

Pierre Lemieux

Chapter 2. Understanding the Public Debt

Until August 3, 2011, the federal debt ceiling was set at $14.3 trillion, meaning that the federal government was not legally allowed to increase its debt above that amount. On that day, Congress increased it to $15.2 trillion. Otherwise, an imminent shutdown of nonessential government operations and payments was looming, if not a default on the Treasury securities (bonds issued by the federal government) that were soon becoming due. It was not the first time that Congress had jacked up the debt ceiling: since the ceiling was established in 1917, it has been increased more than 100 times.

Pierre Lemieux

3. Lessons from Europe (and Elsewhere)

On everything, Europe blazed the path—from classical Greece where philosophy and science were discovered 25 centuries ago, to contemporary Greece where the recently forgotten art of openly cheating government lenders was rediscovered.

Pierre Lemieux

4. The Hidden Welfare State

Conventional wisdom sees a major difference between Europe and America: European states are welfare states and spend mainly on “social” functions, whereas the American state devotes most of its expenditures to national defense, law and order, and other traditional functions of government. Theda Skocpol, a Harvard University political scientist, is representative of these beliefs when she claims that America is deprived of a European sort of welfare state: “The US,” she writes, “has never come close to having a ‘modern welfare state’ in the British, the Swedish, or any positive Western sense of the phrase.”1 If this is true, we may think that the European sovereign debt problem is due to their welfare state, and that such problem does not threaten America. But these beliefs are at best seriously misleading.

Pierre Lemieux

Chapter 5. Federal Outlook: The Naked Emperor

The epigraph above is often attributed to the late Danish physicist Niels Bohr, but some claim that it was authored by his fellow citizen cartoonist Robert Storm Petersen or by American novelist Mark Twain. The humor comes from the fact that scientist do try to predict both the past and the future, and that they are indeed more successful in the former than in the latter. The failure at predicting the future is especially notable in the social sciences, but is not unique to them: although physicists regularly hit the mark, astronomers and meteorologists, to name only those, are often far off.

Pierre Lemieux

Chapter 6. The Emperor’S Praetorians

Is the emperor naked? Is the sovereign really broke? The question may seem preposterous. After all, the sovereign can force its taxpayers to pay. He is well-organized. He has judges and policemen and, if necessary, soldiers to enforce its will. Moreover, in democratic countries, the taxpayers are the sovereign; they own the state, they have no emperor but themselves, and they will choose to pay with their own money. But what if they cannot or will not pay?

Pierre Lemieux

Chapter 7. The Sovereign’S Bankers

Banks are only one of the sovereign’s lenders, but their holdings of government securities are not insignificant. Consider Europe. At the end of 2010, domestic and European sovereign securities made up about 5 percent of their total assets, to which must be added another 4 percent of straight bank loans to European governments.1 The amount of sovereign debt often represented a sizeable part of the bank shareholders’ equity (and more than total equity in Belgian banks). The BIS notes that “in advanced economies, banks often have sizeable exposures to the home sovereign, and generally have a strong home bias in their sovereign portfolios.” 2 In the United States, it is estimated that 2 percent of commercial banks’ total assets are made of Treasury securities, but the proportion jumps to 13 percent if we add mortgage securities guaranteed by federal agencies and GSEs. 3 So we can say that banks allocate about 10 percent of their assets to supporting the sovereign (not counting munis).

Pierre Lemieux

Chapter 8. Reducing Expenditures: Mission Impossible?

From the late 1940s to 2007, total government expenditures in America rose from about 20 percent to more than 30 percent of GDP; total receipts grew from 20 percent to a bit less than 30 percent. Since the recession, expenditures have jumped to 35 percent of GDP. Two economists with the Federal Reserve Bank of St. Louis correctly conclude that “the rise in the federal debt... is entirely a consequence of the federal government’s increase of expenditures without an offsetting increase in revenues.”1 Government goodies financed by public expenditures have multiplied like loaves and fishes. Reducing government expenditures thus appears to be the best solution, if not the only one. But it is politically easier said than done.

Pierre Lemieux

Chapter 9. Inflating the Debt Away

In a way, everything is more complicated than it appears, for we always find new mysteries and new questions in what we think we knew. In another way, everything is simpler than it looks like, for the general features of any complex phenomenon are usually explainable with a simplified representation of reality, called a “model.” Monetary theory and policy are complex topics, which are approached by economic theories based on such models. We won’t dwell deep into these models for we need to understand only two relatively simple points: increasing the money supply creates inf lation and inf lation reduces debt obligations. We’ll then be in a position to look at what the US government can do in this regard.

Pierre Lemieux

Chapter 10. Contagion: When the Emperor Coughs

We think we know an economic crisis when we see one: it typically includes bankruptcies, unemployment, lower incomes, lower consumption, lower investment, uncertainty, and fear. Sometimes, it is accompanied by def lation (drop in the price level), or even by inf lation like in the early 1980s. But what exactly is an economic crisis?

Pierre Lemieux

Chapter 11. The Least Bad of all Possible Worlds

Avoiding the looming debt crisis in America would require the federal government to increase taxes by 50 percent or reduce its expenditures by 33 percent, like right now (see chapter 5). If this is not feasible, the federal government has three options: (1) repudiating or otherwise defaulting formally on its debt; (2) defaulting stealthily through inf lation; or (3) doing nothing. Famous eighteenth-century philosopher Voltaire mocked the idea that everything in the world was for the best. His admonition applies to the present debt predicament, for there is no good option, only bad ones. Mind you, if there are only bad options, the least bad becomes the good one, just as a cost reduction is equivalent to a benefit. But what is the least bad option?

Pierre Lemieux

Chapter 12. Opportunities

As I am writing these words, the Social Security trustees report that their two trust funds (for retirees and for disability benefit recipients) will be depleted in 21 years, 3 years earlier than previously estimated. 2 By the time this book hits actual and virtual bookstores many other events will have happened. The future takes no time off. Debt problems will likely have surfaced in new countries, or crises will have deepened in countries previously hit. Depending on the depth of these problems, the world economy will be plunging in recession again or will be riding some fragile or illusory recovery. Precise forecasts are impossible, but the main fault lines are easy to imagine. The earthquake will come in due time. The Damocles sword of the federal budget will still be hanging over America. The CBO will have published new long-term forecasts, marginally different from the previous ones, but still predicting an unsustainable growth of the public debt and implying a crash sometime in the future. As usual, the CBO’s optimistic forecast (as opposed to their more realistic “alternative” one) will involve humongous tax increases in order to cover forecasted growth in primary expenditures.

Pierre Lemieux


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