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Wednesday, June 6, 2012

St. Louis Fed: The Crisis In Greece Could Happen Here

Posted By on Wed, Jun 6, 2012 at 7:32 AM

The St. Louis Federal Reserve Bank (one of 12 such regional banks in our nation) does cool stuff sometimes. One of its missions is to "disseminate economic research that is useful to a wide range of audiences, including the general public." Hence this simple video primer on the crisis in Greece, and how it's instructive for us Americans.:


This turns out to be a video version of an incredibly lucid essay that the St. Louis Fed released last month to help regular Joes understand what the hell is going across the pond.

And let's be clear: Although the essay restates what everybody already knows, the simplicity with which it describes the dark storm clouds is kind of devastating: 

As the economic situation in Europe has deteriorated, the U.S. has been going down its own rocky path.... Taxes have to be raised and/or spending must be cut. The pain associated with these actions will fall on different groups, and that leads to political conflict. Political conflict means delay in getting the U.S. fiscal situation on firmer ground. Whether this conflict will scare financial markets and lead to a rollover crisis for the U.S. remains to be seen.....

So what is the moral of this modern debt tragedy?.... Borrowing, by its very nature, is seductive--the rewards are felt immediately and the pain is postponed to the future.
Thus, it is very tempting for government leaders, much like individuals and households, to push the envelope of borrowing to obtain current pleasure while downplaying the pain that will come. As a result, debt burdens can rise to levels that eventually become unsustainable, leading to crisis and periods of severe austerity. The world has moved into such an era now, and the final act of this modern tragedy is yet to come.

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