Everyone owes someone something. Be it the billionaire that just ate a duck dinner or the construction worker driving a Ford, there isn't a single person on this earth that lives solely on the fruits of their own efforts. Although such a notion is a survivalist's dream, the reality is that every aspect of this planet is shaped directly or indirectly by the human race, and as such, everyone owes everyone something. In modern capitalist societies, the magnitude of a repayment of such credit owed for services, goods, or currencies is reflected as debt. Everyone has debt; even governments.
The concept of government debt is fascinating because governments are in no way similar to family households. Governments can decide that bubble gum is the new currency of choice, force as many people as required to work in bubble gum factories, generally against their own wills, and then exterminate anyone who contests the value of the new bubble gum currency. Governments are the beginning and the end. Governments incur costs because governments attempt to solve problems that are unprofitable or impossible to solve privately. Furthermore, they realize debt and then promise to pay it as a mere formality to maintain social order. A world where people franticly hoard gobs of bubble gum only to watch the government walk down the street blowing bubbles would surely lead to chaos. For that reason, governments allow themselves to saddle the weight of self imposed debt, all for executing the unprofitable tasks that thankless nations demand of them.
What are the ways to eliminate debt? There happen to be 3.
1) You pay the debt
2) You default on the debt
3) You inflate your way out of debt
The first two methods are very familiar to households. Either the family pays the creditor, or the creditor deems they are unfit or incapable of payment, and repossesses the loss through a material collection. Should the family attempt it, the third method is called counterfeiting. This practice is illegal. Effective governments have the ability to inflate their way out of debt because they can create a large enough money supply to where the amount once owed becomes inconsequential compared to the amount of money in circulation. The risk is that consumers and companies cannot keep up with the inflation because they lack access to method #3. They have to play by the rules. There's also the dilemma of foreign governments and exchange rates, as countries unable to create currencies would be left behind as devalued currencies from inflationary nations would cause a flood of cheap foreign products onto their domestic shelves, eliminating domestic manufacturing at the hands of cheaper foreign goods. It becomes clear very quickly: print or die.
Europe is experiencing this very dilemma as we speak. The EU lacks a federal entity that can consolidate the debt of all of its members and then project power over all of them, encouraging them to obey fiscally responsible laws. In the United States, it took the Civil War to finally make the states subservient to the Federal government, no matter how profitable the economics of slavery were. Only then was Confederate currency eliminated and modern currency as we know it adopted; this all happening only because the Federal government could destroy anyone contesting the merit or value of the currency. Apply this to Europe and the problem becomes clearer. Europe's only hope is to create a Federal system where it can unify the economies of the weak and strong alike in order to shield the greater Union from market wolves. Their unwillingness to do so is not much unlike that of any nation ordered to do something under the will of a master incapable of delivering punishment. Without a Federal power capable of militarily annihilating any countries that disobey its fiscal decrees, the European Union is left with one slim hope: to become the first aggregate of nations to EVER voluntarily share and exert control over each others' fiscal futures without fear of military repercussions.
How monumental would this be? It would be incredible on a scale only fitting for nations carrying debts as large as these:
|Country||Debt as % of GDP|
Of course, the United States is not in much better shape. Our debt to GDP percentage is 100%, totaling USD 14.6 trillion. Austerity, as embraced in Europe, is being advertised as a viable option. This would surely be the ideal case if humans thought more like robots: rationally examining each situation and understanding the value of an individual's sacrifice for the common good; however this is not our nature. Greece's attempt at solvency is proof positive that austerity does not work as a sole solution because austerity takes an immeasurable toll on the psyches of recently fired citizens and emerges in the form of a Greek economy currently shrinking by 5.3%. Taxes will have to be increased in coordination with reduced entitlements, but that still will not be enough, because austerity and taxes lead to deflationary cycles.
Take a look at the options again. There are three ways to eliminate debt. Every major economy in the world can freely print money to service debt obligations, except for the EU. Nobody on either side of the Atlantic can agree on whether taxes should be raised or entitlements cut. Western nations are nations of indecision. Taking all of this in, there is only one course of action: pass the buck to central bankers and leave them no choice but to solve it.
Much more cautious after the fallout of QE's and ECB bailouts, central bankers are wisely waiting for the pain to become so intense that the very electorates that voted radicals into office and chastised the central banks, which are holding up the USD 900 trillion in worldwide derivatives that could wholly swallow the measly world annual GDP of USD 60 trillion, beg for the very medicine they once, twice, thrice rejected.
There is not a chance on this planet that central banks and sovereign governments will purposely seek a path to ruin in the form of an uncontrolled default. The EU lacks the ability to materialize money from the nether, but they're getting there. The Germans publicly display their disdain for the Greek bailout, but their votes reveal their hearts as they also vote to keep the same politicians in office that support the donation of funds to Greece, France, Italy, and the ECB. Slowly, painfully, but surely, the EU is pioneering a course where they can shield weaker nations and their inevitable defaults behind the cover of a robust, unified Federalist entity. Expansion, funded by governments, is inevitable. Everyone will grow their way out of this mess, even if the very existence of the growth is questioned.
The only requirement is faith.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.