Essentially, we are spreading the cost of the financial crisis over the next several years. What felt like a free lunch (i.e. bailouts, money printing) will now feel like a drag on society (if it doesn’t already). But are high debt levels really that bad? After-all, we’ve seen similar levels in the past. The BIS report explains:
Should we be concerned about high and sharply rising public debts? Several advanced economies have experienced higher levels of public debt than we see today. In the aftermath of World War II, for example, government debts in excess of 100% of GDP were common.2 And none of these led to default.3 In more recent times, Japan has been living with a public debt ratio of over 150% without any adverse effect on its cost. So it is possible that investors will continue to put strong faith in industrial countries’ ability to repay, and that worries about excessive public debts are exaggerated.4 Indeed, with only a few exceptions, during the crisis, nominal government bond yields have fallen and remained low. So far, at least, investors have continued to view government bonds as relatively safe.
But bond traders are notoriously short-sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decades. We take a longer and less benign view of current developments, arguing that the aftermath of the financial crisis is poised to bring a simmering fiscal problem in industrial economies to boiling point.
And more…
Today, interest rates are exceptionally low and the growth outlook for advanced economies is modest at best. This leads us to conclude that the question is when markets will start putting pressure on governments, not if. When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that authorities are going to issue to finance their extravagant ways?
More specifically, but along the same thread, Richard Douthwaite, an economist and founding member of Feasta, outlines the reasons why the Irish banking system and economy is in such trouble. This provides a bottom-up examination of why countries are in such debt in the first place:
