Over the past several decades, most of the major industrialized nations have been borrowing and spending unprecedented amounts of money. This has enabled them to greatly stimulate their economies, and has allowed hundreds of millions of people to live fabulous lifestyles. But there is a problem when nations try to live beyond their means for decades. A big problem. The problem is called debt. Right now the world is facing a sovereign debt crisis that threatens to throw the entire globe into a very, very deep recession. In fact, Bank of England Governor Mervyn King recently called this the worst financial crisis in history. While that might be a bit dramatic (at least at this point), the reality is that the situation in the financial world is becoming very, very serious. You see, debts have to be paid back eventually. All over the globe, national governments are trying to deal with debt and interest on debt that has piled up so dramatically that they don’t know what to do about it. For example, the United States is in a complete mess. The U.S. national debt is scheduled to soon surpass 13 trillion dollars. To get an idea of how big that is, if you went out and spent one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars. It would take you more than 403,000 years to spend 13 trillion dollars. Are you starting to get the picture? This gigantic debt that the U.S. government has accumulated is about to turn the American Dream into the American Nightmare. It is literally impossible for the United States to ever pay the national debt off, and as it continues to explode it will increasingly become a crushing load that the U.S. economy can simply not support.
But the United States is not alone. All over the world national governments are suddenly realizing that their debt loads have gotten far out of control.
So what does that mean?
Well, there are two ways that such a problem can be handled. Usually, the governments around the world have just borrowed and spent even more money to cover up their financial messes. That always makes the long-term problems far worse, but it does make things more pleasant in the short-term.
The second alternative is to cut borrowing and spending. That seems to be the popular choice here in 2010. However, when a government borrows less and spends less it has a very negative side effect. It causes an economic downturn. Just as governments can stimulate economies through spending, it can also deflate economies by withdrawing spending.
But that is what the IMF and central banks around the globe are demanding that national governments do. We have all heard about the austerity measures that the IMF and the ECB have imposed on Greece. The Greek people seem less than pleased that they are not going to be able to live beyond their means any longer, but they don’t have any choice in the matter. When a nation gets into so much debt that it causes a national crisis, then those holding the purse strings end up gaining control.
But it just isn’t Greece that austerity measures are being imposed upon. Right now we are seeing them be imposed all over the globe….
*Portugal has agreed to impose fresh austerity measures that include much higher taxes and very deep budget cuts.
*The Spanish government has just approved a 15 billion euro austerity plan.
*Tens of thousands of workers and pensioners have taken to the streets in Romania to protest the harsh austerity measures that the Romanian government is imposing at the request of the International Monetary Fund.
*It is being reported that Germans are bracing themselves for a “bitter” round of government budget cuts.
*The exploding debt situation in the U.K. was one of the key issues in the most recent election. David Cameron is pledging to get the U.K.’s exploding debt situation under control. But these cuts are likely to be quite painful. In fact, Bank of England governor Mervyn King has even gone so far as to warn that public anger over the “austerity measures” that will be implemented in the U.K. will be so incredibly painful that whichever party is seen as responsible will be out of power for a generation.
*Federal Reserve Chairman Ben Bernanke says that the U.S. economy needs some tough medicine and that United States citizens will soon have to make difficult choices between higher taxes and reduced government spending.
*California Governor Arnold Schwarzenegger is reportedly planning to seek “terrible cuts” in an effort to bring the exploding debt of the government of California under control.
*In fact, a large number of U.S. states are preparing for their biggest budget cuts in decades.
It seems like all over the world there is talk of budget cuts and higher taxes. While it is most definitely a good thing to get debt under control, the reality is that all of these austerity measures are going to cause economic pain. In fact, for a global economy already teetering on the edge of disaster, all of these austerity measures may be enough to push the globe into a devastating depression.
But that is the price for living wildly beyond our means for decades. Bills always come due. The only way to compensate for living beyond our means is to live under our means for a while. But the world is not going to like that one bit. There have already been “austerity riots” in Greece and Romania. Some economists are already predicting that such riots will even pop up in places like the United Kingdom and the United States.
So what can be done?
Well, in this case national governments around the world have to choose between a rock and a hard place.
Either they keep swamping themselves with debt in order to try to help their economies recover, or they try to get the debt under control yet risk plunging their economies into a depression.
Both alternatives are unattractive.
But that is what you get when you spend your way into financial oblivion.
The world financial system is a gigantic mess right now, and there is going to be an awful lot of pain as things get sorted out.
In fact, the economic pain of the last couple of years is nothing compared to what is coming. People are going to be absolutely shocked. The world as we know it is going to fundamentally change.
So get ready. All of these “austerity measures” are only the beginning. Things are about to get really messy.