Crunch Time

Remembering Days Without Debt

The current global debt crisis didn’t exist in the 1990s. At that time, the United States had a budget surplus. Even the poorer countries of Western Europe were shedding debt as a percentage of gross domestic product. This sanguine picture changed in 2008, however, when Lehman Brothers and other financial behemoths collapsed. The deep economic downturn that followed slashed revenues and sparked government spending in many nations. The bottom line: Sovereign debt has soared in most advanced nations, while central bankers pump up their balance sheets to historic levels to keep feeble economies going. The situation worsened in 2010, when sudden, sharp spikes in borrowing rates hit several European nations, leading to a fiscal crunch and the potential for economic disaster.

Today, many nations face the possibility of a vicious circle of higher government bond rates leading to higher debt. Understandably, their worried lenders are demanding that these countries pay premiums on their loans. But higher rates only increase a nation’s debt, leading to a tipping point at which rates soar and a Greek-style financial crisis develops. When this happens...