A Cautionary Tale of Three Fiscal Crises: Simon Johnson
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June 20 (Bloomberg) -- In today’s world, there are threekinds of fiscal crises brought on by too much governmentspending, and three kinds of responses. We can call them thenightmare scenario, the preemptive experiment and the head-in-the-sand model.
In the nightmare scenario, a country runs large deficitsfor a decade or more -- and the financial markets are happy tobuy its debt at low interest rates. But then the marketssuddenly turn, deciding that the country is going straight off acliff. The cost of financing the national debt goes through theroof. The government has little choice but to make immediate,large spending cuts.