I am sure by now that you all know I think debt levels the world over are way too high and they pose a latent threat to recovery and to the economic futures of many countries the world over.
So in this post I just wanted to make people aware of a couple of items. The first is a book I am currently reading and the second is a news article I read a couple of weeks ago that has been haunting me ever since.
The book I am reading is called "This Time it's Different - Eight Centuries of Financial Folly" and while the title seems a somewhat whimsical, I have been completely surprised by the content and the quality of the information within.
The authors, Carmen Reinhart and Kenneth Rogoff have complied debt and debt default statistics for countries spanning 8 centuries. And they have provided some very interesting and compelling research surrounding this very important topic. While I am not done the material yet, I can say that when you look at the current debt situation the world over it becomes very apparent that we have seen this movie before and the ending was not a "happily ever after" one.
Next, and very much in line with the discussion on the book I am reading, is an article that appeared on the Bloomberg website on July 12, 2010. A small article for this publisher but its import is staggering. Essentially the US Federal Government, through its co-Chairman of the National Commission on Fiscal Responsibility and Reform, Erskine Bowles, has told States that they cannot rely on the Federal Government for budget bailouts.
States in the US have seen tax revenues plummet during the recession and they have not come back despite some recovery. This has led many States to look to the Federal Government to make up budget shortfalls. Apparently this is no longer possible.
The question that arises from this situation is what will the Federal Government do if a State looks as though it is going to default on its debt?