The U.S. sovereign debt comes from a broken federal fiscal system that taxes at 18 percent of GDP and spends at 25 percent – and that has bailed out its financial system. In the process of making up for lost tax revenue, recapitalizing banks, and paying out transfers, it has transformed the private debts of the banking sector into the public debts of the nation. In Europe the same story is augmented by a banking system filled full of rapidly devaluing assets tied to a financial doomsday device called the Euro. In both cases, while there may a be crisis in sovereign debt markets, the idea that this was caused by sovereigns’ “out of control spending” simply does not stand up to empirical scrutiny. The crisis is, and remains, a banking crisis.
Keynes once argued that “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” Nowhere is this truer than in the current “consensus” over austerity policies.