Advancing a Free Society

How Dismal is the Fiscal Future For America and Europe?

Monday, August 30, 2010

Posner lays out clearly many of the present and future solvency and default risks to the United States federal government. He bases some of the analysis on a valuable recent Morgan Stanley report with the provocative title “Ask Not Whether Governments Will Default, but How”. Default on some of their debt by countries like Greece and Italy are real possibilities, and default by leading countries like the US and Germany is surely possible. But I do not believe their default is at all inevitable.

The report first presents the usual measure of default risk- the ratio of government debt (not held by other government agencies) to GDP in 2009- for the federal government of the US and for eight European nations: France, Germany, Greece, Ireland, Italy, Portugal, Spain and the United Kingdom. On this criterion, Greece and Italy look in trouble, with ratios of about 1.15, and the US looks in reasonable good shape, with a ratio of about ½, which is much lower than that for most of the other nations in their comparison set. For example, Germany’s debt/GDP ratio is 0.73, while the United Kingdom’s ratio is 0.68.

Continue reading Gary Becker on The Becker-Posner Blog