Government Debt Crisis.

This is where the results of the flawed economic model upon which the entire Western economic structure stands now have to be dealt with. It is the second and inevitable phase of the Global Financial Crisis. Whether it moves to a third phase depends on how well the West deals with phase two.

At the very heart of the problem was the notion that you could enjoy a personal, local, national and international living standard which was way higher than income at any of these levels predicated and that the gap could be filled by borrowing. Simply put, it is okay to borrow to invest but not to live. New cars and kitchens and clothes are not investments because mostly their value drops off sharply after purchase.

The unworkable was made to work by the notion that you could remain solvent on this borrowing binge by inflating the value of assets without improving their worth to the economy. House prices went up and up for example. This was an illusion. What actually happened was the value of money and its actual availability went down and down. Moreover equity, some of it downright fraudulent, was created which in turn created notional money, which in reality never actually existed.

I will explain. Just before the start of the crash if you added up all the foreign currency reserves of all the countries in the Western system, ie the Euro-zone, the U.S and U.K. the amount held by this combination collectively was only 8% of such reserves in the world. Yet the latest estimate I have seen for the total losses suffered by those economies in the crisis is 200 trillion dollars. Essentially this is money that was never there in the first place and only imagined to be so because of over valuing assets as a mater of trade rather than of improvement.

Thus it happens that there are countless families who owe more than they own. This is at its worst in the U.S and the U.K. There are also countries, all of them, who have borrowed in order to raise the standard of services and benefits to their populations, beyond the level of the revenue their taxation generates. The worst of these, relative to the size of their economies, are Greece and the countries of southern Europe.

All of them have to economise and cut in order to pay their huge interest bills on accumulated loans, cut again and increase taxes to bring their budgets into balance and cut yet more in order to have enough over to repay those loans. If they cut too much and their economies shrink further the problem gets worse. If they do not cut enough and the loans grow bigger the problem gets worse but in a different way. None of it creates buoyant conditions in the market where we send over half our exports. This reduces our ability to expand our way out of trouble.

There is no certainty that austerity measures can be imposed on the scale necessary to remedy the problems. Some countries may have to default and restructure their debt. This could produce a domino sequence, like the global financial crisis itself and engulf all the indebted nations. As I have said previously a government debt crisis is the biggest crisis of all. This has now begun.