ECONOMIC CRISIS IN USA AND EUROZONE REASONS AND SOLUTIONS

INTRODUCTION:
The term economic crisis is applied broadly to a variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. ther situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. !inancial crises directly result in a loss of paper wealth but do not necessarily result in changes in the real economy. "egative #$% growth lasting two or more &uarters is called a recession. 'n especially prolonged or severe recession may be called a depression, while a long period of slow but not necessarily negative growth is sometimes called economic stagnation. (ome economists argue that many recessions have been caused in large part by financial crises. ne important e)ample is the #reat $epression, which was preceded in many countries by bank runs and stock market crashes. The subprime mortgage crisis and the bursting of other real estate bubbles around the world also led to recession in the *.(. and a number of other countries in late 200+ and 2009. (ome economists argue that financial crises are caused by recessions instead of the other way around, and that even where a financial crisis is the initial shock that sets off a recession, other factors may be more important in prolonging the recession. In particular, ,ilton !riedman and 'nna (chwart- argued that the initial economic decline associated with the crash of 1929 and the bank panics of the 19.0s would not have turned into a prolonged depression if it had not been reinforced by monetary policy mistakes on the part of the !ederal /eserve.

Common Causes and consequences of financial crisis:

1 S!ra!e"ic com#lemen!ari!ies in financial mar$e!s: It is often observed that successful investment re&uires each investor in a financial market to guess what other investors will do. In many cases investors have incentives to coordinate their choices. !or e)ample, someone who thinks other investors want to buy lots of 0apanese yen may e)pect the yen to rise in value, and therefore has an incentive to buy yen too. 1conomists call an incentive to mimic the strategies of others strategic complementarity.

Le&era"e:

Leverage, means borrowing to finance investments, is fre&uently cited as a contributor to financial crises. 2hen a financial institution 3or an individual4 only invests its own money, it can, in the very worst case, lose its own money. 5ut when it borrows in order to invest more, it can potentially earn more from its investment, but it can also lose more than all it has. Therefore leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy. (ince bankruptcy means that a firm fails to honour all its promised payments to other firms, it may spread financial troubles from one firm to another. The average degree of leverage in the economy often rises prior to a financial crisis. ' Asse!(lia)ili!* misma!c+: 'nother factor believed to contribute to financial crises is asset-liability mismatch, a situation in which the risks associated with an institution6s debts and assets are not appropriately aligned. !or e)ample, commercial banks offer deposit accounts which can be withdrawn at any time and they use the proceeds to make long7term loans to businesses and homeowners. The mismatch between the banks6 short7term liabilities 3its deposits4 and its long7term assets 3its loans4 is seen as one of the reasons bank runs occur 3when depositors panic and decide to withdraw their funds more &uickly than the bank can get back the proceeds of its loans4. In an international conte)t, many emerging market governments are unable to sell bonds denominated in their own currencies, and therefore sell bonds denominated in *( dollars instead. This generates a mismatch between the currency denomination of their liabilities 3their bonds4 and their assets 3their local ta) revenues4, so that they run a risk of sovereign default due to fluctuations in e)change rates. , Uncer!ain!* and +erd )e+a&ior: ,any analyses of financial crises emphasi-e the role of investment mistakes caused by lack of knowledge or the imperfections of human reasoning. 5ehavioral finance studies errors in economic and &uantitative reasoning. 8istorians, notably 9harles %. :indleberger, have pointed out that crises often follow soon after ma;or financial or technical innovations that present investors with new types of financial opportunities, which he called <displacements< of investors6 e)pectations. 1arly e)amples include the (outh (ea 5ubble and ,ississippi 5ubble of 1=20, which occurred when the notion of investment in shares of company stock was itself new and unfamiliar, and the 9rash of 1929, which followed the introduction of new electrical and

transportation technologies. ,ore recently, many financial crises followed changes in the investment environment brought about by financial deregulation, and the crash of the dot com bubble in 2001 arguably began with <irrational e)uberance< about Internet technology. Re"ula!or* failures #overnments have attempted to eliminate or mitigate financial crises by regulating the financial sector. ne ma;or goal of regulation is transparency> making institutions6 financial situations publicly known by re&uiring regular reporting under standardi-ed accounting procedures. 'nother goal of regulation is making sure institutions have sufficient assets to meet their contractual obligations, through reserve re&uirements, capital re&uirements, and other limits on leverage. . Con!a"ion Contagion refers to the idea that financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from one country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries. 2hen the failure of one particular financial institution threatens the stability of many other institutions, this is called systemic risk. ne widely cited e)ample of contagion was the spread of the Thai crisis in 199= to other countries like (outh :orea. 8owever, economists often debate whether observing crises in many countries around the same time is truly caused by contagion from one market to another, or whether it is instead caused by similar underlying problems that would have affected each country individually even in the absence of international linkages. / Recessionar* effec!s (ome financial crises have little effect outside of the financial sector, like the 2all (treet crash of 19+=, but other crises are believed to have played a role in decreasing growth in the rest of the economy. There are many theories why a financial crisis could have a recessionary effect on the rest of the economy. These theoretical ideas include the 6financial accelerator6, 6flight to &uality6 and 6flight to li&uidity6, and the :iyotaki7,oore model. (ome 6third generation6 models of currency crises e)plore how currency crises and banking crises together can cause recessions.

Lis! of recessions in !+e Uni!ed S!a!es

In the *nited (tates, the unofficial beginning and ending dates of national recessions have been defined by an 'merican private nonprofit research organi-ation known as the "ational 5ureau of 1conomic /esearch 3"51/4. The "51/ defines a recession as <a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product 3#$%4, real income, employment, industrial production, and wholesale7retail sales<. There have been as many as ?= recessions in the *nited (tates since 1=90 3although economists and historians dispute certain 19th7century recessions4. 9ycles in agriculture, consumption, and business investment, and the health of the banking industry also contribute to these declines. *.(. recessions have increasingly affected economies on a worldwide scale, especially as countries6 economies become more intertwined. Earl* recessions and crises 'ttempts have been made to date recessions in 'merica beginning in 1=90. These periods of recession were not identified until the 1920s. To construct the dates, researchers studied business annals during the period and constructed time series of the data. The earliest recessions for which there is the most certainty are those that coincide with ma;or financial crises.

Name 9opper %anic of 1=+9

C+arac!eris!ics @oss of confidence in copper coins due to debasement and counterfeiting led to commercial free-e up that halted the economy of several northern (tates and was not alleviated until the introduction of new paper money to restore confidence. 0ust as a land speculation bubble was bursting, deflation from the 5ank of 1ngland 3which was facing insolvency because of the cost of #reat 5ritain6s involvement in the !rench /evolutionary 2ars4 crossed to "orth 'merica and

%anic of 1=9=

disrupted commercial and real estate markets in the *nited (tates and the 9aribbean, and caused a ma;or financial panic. %rosperity continued in the south, but economic activity was stagnant in the north for three years. The young *nited (tates engaged in the Auasi72ar with !rance.

1+02B1+0? recession

' boom of war7time activity led to a decline after the %eace of 'miens ended the war between the *nited :ingdom and !rance. 9ommodity prices fell dramatically. Trade

Name

C+arac!eris!ics was disrupted by pirates, leading to the !irst 5arbary 2ar. The 1mbargo 'ct of 1+0= was passed by the *nited (tates 9ongress under %resident Thomas 0efferson as tensions increased with the *nited :ingdom. 'long with trade restrictions imposed by the 5ritish, shipping7related industries were hard hit. The !ederalists fought the embargo and allowed smuggling to take place in "ew 1ngland. Trade volumes, commodity prices and securities prices all began to fall. ,acon6s 5ill "umber 2 ended the embargoes in ,ay 1+10, and a recovery started. The *nited (tates entered a brief recession at the beginning of 1+12. The decline was

$epression of 1+0=

1+12 recession

brief primarily because the *nited (tates soon increased production to fight the 2ar of 1+12, which began 0une 1+, 1+12. (hortly after the war ended on ,arch 2., 1+1C, the *nited (tates entered a period of financial panic as bank notes rapidly depreciated because of inflation following the

1+1CB21 depression

war. The 1+1C panic was followed by several years of mild depression, and then a ma;or financial crisis B the %anic of 1+19, which featured widespread foreclosures, bank failures, unemployment, a collapse in real estate prices, and a slump in agriculture and manufacturing. 'fter only a mild recovery following the lengthy 1+1CB21 depression, commodity prices hit a peak in ,arch 1+22 and began to fall. ,any businesses failed, unemployment rose and an increase in imports worsened the trade balance. The %anic of 1+2C, a stock crash following a bubble of speculative investments in

1+22B1+2. recession

1+2CB1+2D recession

@atin 'merica led to a decline in business activity in the *nited (tates and 1ngland. The recession coincided with a ma;or panic, the date of which may be more easily determined than general cycle changes associated with other recessions.

1+2+B1+29 recession

In 1+2D, 1ngland forbade the *nited (tates to trade with 1nglish colonies, and in 1+2=, the *nited (tates adopted a counter7prohibition. Trade declined, ;ust as credit became tight for manufacturers in "ew 1ngland.

Name

C+arac!eris!ics

1+..B.? recession

The *nited (tates6 economy declined moderately in 1+..B.?. "ews accounts of the time confirm the slowdown. The subse&uent e)pansion was driven by land speculation.

0ree 1an$in" Era !o !+e 2rea! De#ression In the 1+.0s, *.(. %resident 'ndrew 0ackson fought to end the (econd 5ank of the *nited (tates. !ollowing the 5ank 2ar, the (econd 5ank lost its charter in 1+.D. !rom 1+.= to 1+D2, there was no national presence in banking, but still plenty of state and even local regulation, such as laws against branch banking which prevented diversification. In 1+D., in response to financing pressures of the 9ivil 2ar, 9ongress passed the "ational 5anking 'ct, creating nationally chartered banks. There was neither a central bank nor deposit insurance during this era, and thus banking panics were common. /ecessions often led to bank panics and financial crises, which in turn worsened the recession.

Name

C+arac!eris!ics ' sharp downturn in the 'merican economy was caused by bank failures and lack of confidence in the paper currency. (peculation markets were greatly affected when 'merican banks stopped payment in specie 3gold and silver coinage4. ver D00 banks failed in this period. In the (outh, the cotton market completely collapsed. This was one of the longest and deepest depressions. It was a period of

1+.DB1+.+ recession

late 1+.9Blate

pronounced deflation and massive default on debt. The 9leveland Trust 9 months above it. The Inde) declined .?..E during this depression.

1+?. recession 9ompany Inde) showed the economy spent D+ months below its trend and only 1+?CBlate 1+?D This recession was mild enough that it may have only been a slowdown in the recession growth cycle. ne theory holds that this would have been a recession, e)cept the *nited (tates began to gear up for the ,e)icanB'merican 2ar, which

Name began 'pril 2C, 1+?D. 1+?=B?+ recession 1+C.BC? recession

C+arac!eris!ics The 9leveland Trust 9ompany Inde) declined 19.=E during 1+?= and 1+?+. It is associated with a financial crisis in #reat 5ritain. Interest rates rose in this period, contributing to a decrease in railroad investment. (ecurity prices fell during this period. 2ith the e)ception of falling business investment there is little evidence of contraction in this period. !ailure of the hio @ife Insurance and Trust 9ompany burst a 1uropean speculative bubble in *nited (tates6 railroads and caused a loss of confidence in 'merican banks. ver C,000 businesses failed within the first year of the

%anic of 1+C=

%anic, and unemployment was accompanied by protest meetings in urban areas. This is the earliest recession to which the "51/ assigns specific months 3rather than years4 for the peak and trough. There was a recession before the 'merican 9ivil 2ar, which began 'pril 12,

1+D0BD1 recession

1+D1. Farnowit- says the data generally show a contraction occurred in this period, but it was &uite mild. ' financial panic was narrowly averted in 1+D0 by the first use of clearing house certificates between banks. The 'merican 9ivil 2ar ended in 'pril 1+DC, and the country entered a lengthy period of general deflation that lasted until 1+9D. The *nited (tates

1+DCBD= recession

occasionally e)perienced periods of recession during the /econstruction era. %roduction increased in the years following the 9ivil 2ar, but the country still had financial difficulties. The post7war period coincided with a period of some international financial instability. ' few years after the 9ivil 2ar, a short recession occurred. It was unusual since it came amid a period when railroad investment was greatly accelerating, even producing the !irst Transcontinental /ailroad. The railroads built in this period

1+D9B=0 recession

opened up the interior of the country, giving birth to the !armers6 movement. The recession may be e)plained partly by ongoing financial difficulties following the war, which discouraged businesses from building up inventories. (everal months into the recession, there was a ma;or financial panic.

Name

C+arac!eris!ics 1conomic problems in 1urope prompted the failure of 0ay 9ooke G 9ompany, the largest bank in the *nited (tates, which burst the post79ivil 2ar speculative bubble. The 9oinage 'ct of 1+=. also contributed by immediately depressing the price of silver, which hurt "orth 'merican mining interests. The deflation and wage cuts of the era led to labor turmoil, such as the #reat /ailroad (trike of 1+==. In 1+=9, the *nited (tates returned to the gold standard with the (pecie %ayment /esumption 'ct. This is the longest period of economic contraction recogni-ed by the "51/. The @ong $epression is sometimes held to be the entire period from 1+=.B9D. @ike the @ong $epression that preceded it, the recession of 1++2B+C was more of a price depression than a production depression. !rom 1+=9 to 1++2, there had been a boom in railroad construction which came to an end, resulting in a decline in both railroad construction and in related industries, particularly iron and steel. ' ma;or economic event during the recession was the %anic of 1++?. Investments in railroads and buildings weakened during this period. This slowdown was so mild that it is not always considered a recession. 9ontemporary accounts apparently indicate it was considered a slight recession. 'lthough shorter than the recession in 1++=B++ and still modest, a slowdown in 1+90B91 was somewhat more pronounced than the preceding recession. International monetary disturbances are blamed for this recession, such as the %anic of 1+90in the *nited :ingdom. !ailure of the *nited (tates /eading /ailroad and withdrawal of 1uropean investment led to a stock market and banking collapse. This %anic was also precipitated in part by a run on the gold supply. The Treasury had to issue bonds to purchase enough gold. %rofits, investment and income all fell, leading to political instability, the height of the *.(. populist movement and the !ree (ilver movement. The period of 1+9.B9= is seen as a generally depressed cycle that had a short

%anic of 1+=.and the @ong $epression

1++2B+C recession

1++=B++ recession

1+90B91 recession

%anic of 1+9.

%anic of 1+9D

spurt of growth in the middle, following the %anic of 1+9.. %roduction shrank and deflation reigned.

Name 1+99B1900 recession

C+arac!eris!ics This was a mild recession in the period of general growth beginning after 1+9=. 1vidence for a recession in this period does not show up in some annual data series. Though not severe, this downturn lasted for nearly two years and saw a distinct decline in the national product. Industrial and commercial production both declined, albeit fairly modestly. The recession came about a year after a 1901 stock crash. ' run on :nickerbocker Trust 9ompany deposits on ctober 22, 190=, set

1902B0? recession

%anic of 190=

events in motion that would lead to a severe monetary contraction. The fallout from the panic led to 9ongress creating the !ederal /eserve (ystem. This was a mild but lengthy recession. The national product grew by less than 1E, and commercial activity and industrial activity declined. The period was also marked by deflation. %roductions and real income declined during this period and were not offset

%anic of 1910B 1911

/ecession 191.B191?

of until the start of 2orld 2ar I increased demand. Incidentally, the !ederal /eserve 'ct was signed during this recession, creating the !ederal /eserve (ystem, the culmination of a se&uence of events following the %anic of 190=. (evere hyperinflation in 1urope took place over production in "orth 'merica.

%ost72orld

This was a brief but very sharp recession and was caused by the end of wartime caused high unemployment. The 1921 recession began a mere 10 months after the post72orld 2ar I recession, as the economy continued working through the shift to a peacetime economy. The recession was short, but e)tremely painful. The year 1920 was the single most deflationary year in 'merican historyH production, however, did not fall as much as might be e)pected from the deflation. #"% may have declined between 2.C and = percent, even as wholesale prices declined by .D.+E. The economy had a strong recovery following the recession.

2ar I recession production, along with an influ) of labor from returning troops. This, in turn,

$epression of 1920B21

192.B2? recession

!rom the depression of 1920B21 until the #reat $epression, an era dubbed the /oaring Twenties, the economy was generally e)panding. Industrial

Name

C+arac!eris!ics production declined in 192.B2?, but on the whole this was a mild recession. This was an unusual and mild recession, thought to be caused largely because 8enry !ord closed production in his factories for si) months to switch

192DB2= recession

from production of the ,odel T to the ,odel '. 9harles %. :indleberger says the period from 192C to the start of the #reat $epression is best thought of as a boom, and this minor recession ;ust proof that the boom <was not general,

uninterrupted or e)tensive<. 2rea! De#ression on3ard /ecessions may be viewed as undesirable, some people benefit from them. ,odern recessions tend to create monetary winners and losers by rapidly shifting assets. /ecessions harm middle7class and lower earners the most, and upper earners may lose small businesses and have greater assets at risk. 5ut wealthy individuals and cash7rich companies can benefit dramatically from the results of a recession by buying commercial properties at tremendous discounts and waiting ;ust a few years for property values to return, multiplying their wealth. @arge corporations benefit by eliminating or absorbing competitors and by trimming labor and other costs. The overall result is a transfer of assets from the general populace to the wealthy. !ollowing the end of 2orld 2ar II and the large ad;ustment as the economy ad;usted from wartime to peacetime in 19?C, the collection of many economic indicators, such as unemployment and #$%, became standardi-ed. /ecessions after 2orld 2ar II may be compared to each other much more easily than previous recessions because of these available data.

Name #reat $epression 'ug 1929 B ,ar 19..

2D4 decline

C+arac!eris!ics (tock markets crashed worldwide. ' banking collapse took place in the *nited (tates. 1)tensive new tariffs and other factors contributed

I2D.=E

to an e)tremely deep depression. The *nited (tates did remain in a depression until 2orld 2ar II. In 19.D, unemployment fell to 1D.9E, but later returned to 19E in 19.+ 3near 19.. levels4. The /ecession of 19.= is only considered minor when compared to the #reat $epression, but is otherwise among the worst recessions of

/ecession of I1+.2E 19.=B19.+

Name

2D4 decline

C+arac!eris!ics the 20th century. Three e)planations are offered for the recession> that tight fiscal policy from an attempt to balance the budget after the e)pansion of the "ew $eal caused recession, that tight monetary policy from the !ederal /eserve caused the recession, or that declining profits for businesses led to a reduction in investment. The decline in government spending at the end of 2orld 2ar II led to an enormous drop in gross domestic product, making this technically a

/ecession of 19?C

I12.=E

recession. This was the result of demobili-ation and the shift from a wartime to peacetime economy. The post7war years were unusual in a number of ways 3unemployment was never high4 and this era may be considered a <sui generis end7of7the7war recession<. The 19?+ recession was a brief economic downturnH forecasters of the

/ecession of 19?9

I1.=E

time e)pected much worse, perhaps influenced by the poor economy in their recent lifetimes. The recession also followed a period of monetary tightening. 'fter a post7:orean 2ar inflationary period, more funds were transferred to national security. In 19C1, the !ederal

/ecession of 19C.

I2.DE

/eserve reasserted its independence from the *.(. Treasury and in 19C2, the !ederal /eserve changed monetary policy to be more restrictive because of fears of further inflation or of a bubble forming. ,onetary policy was tightened during the two years preceding 19C=, followed by an easing of policy at the end of 19C=. The budget

/ecession of 19C+

I..=E

balance resulted in a change in budget surplus of 0.+E of #$% in 19C= to a budget deficit of 0.DE of #$% in 19C+, and then to 2.DE of #$% in 19C9. 'nother primarily monetary recession occurred after the !ederal /eserve began raising interest rates in 19C9. The government switched from deficit 3or 2.DE in 19C94 to surplus 3of 0.1E in 19D04. 2hen the economy emerged from this short recession, it began the second7

/ecession of I1.DE 19D0BD1

Name

2D4 decline

C+arac!eris!ics longest period of growth in "51/ history. The $ow 0ones Industrial 'verage 3$ow4 finally reached its lowest point on !eb. 20, 19D1, about ? weeks after %resident :ennedy was inaugurated. The relatively mild 19D9 recession followed a lengthy e)pansion. 't the end of the e)pansion, inflation was rising, possibly a result of

/ecession of 19D9B=0

I0.DE

increased deficits. This relatively mild recession coincided with an attempt to start closing the budget deficits of the Jietnam 2ar 3fiscal tightening4 and the !ederal /eserve raising interest rates 3monetary tightening4. ' &uadrupling of oil prices by %19 coupled with high government spending because of the Jietnam 2ar led to stagflation in the *nited

19=.B=C recession

I..2E

(tates. The period was also marked by the 19=. oil crisis and the 19=.B19=? stock market crash. The period is remarkable for rising unemployment coinciding with rising inflation. The "51/ considers a very short recession to have occurred in 19+0, followed by a short period of growth and then a deep recession. *nemployment remained relatively elevated in between recessions.

19+0 recession

I2.2E

The recession began as the !ederal /eserve, under %aul Jolcker, raised interest rates dramatically to fight the inflation of the 19=0s. The early 6+0s are sometimes referred to as a <double7dip< or <27 shaped< recession. The Iranian /evolution sharply increased the price of oil around the world in 19=9, causing the 19=9 energy crisis. This was caused by the new regime in power in Iran, which e)ported oil at inconsistent

1arly

19+0s

recession

I2.=E

intervals and at a lower volume, forcing prices up. Tight monetary policy in the *nited (tates to control inflation led to another recession. The changes were made largely because of inflation carried over from the previous decade because of the 19=. oil crisis and the 19=9 energy crisis.

Name

2D4 decline

C+arac!eris!ics 'fter the lengthy peacetime e)pansion of the 19+0s, inflation began to increase and the !ederal /eserve responded by raising interest rates

1arly

1990s

recession

I1.?E

from 19+D to 19+9. This weakened but did not stop growth, but some combination of the subse&uent 1990 oil price shock, the debt accumulation of the 19+0s, and growing consumer pessimism combined with the weakened economy to produce a brief recession. The 1990s were the longest period of growth in 'merican history. The collapse of the speculative dot7com bubble, a fall in business outlays

1arly

2000s

recession

I0..E

and investments, and the (eptember 11th attacks, brought the decade of growth to an end. $espite these ma;or shocks, the recession was brief and shallow. 2ithout the (eptember 11th attacks, the economy might have avoided recession altogether.

T+e U S economic crisis Uni!ed S!a!es de)!(ceilin" crisis of %51'

The 201. *nited (tates debt7ceiling crisis is part of an ongoing political debate in the *nited (tates 9ongress about federal government spending, the national debt and debt ceiling. The 201. crisis began in 0anuary 201. and ended on ctober 1=, 201. with the passing of the 9ontinuing 'ppropriations 'ct, 201?, though the debate continues. 'fter the passing in early 0anuary 201., the 'merican Ta)payer /elief 'ct of 2012 to avert the pro;ected fiscal cliff, political attention shifted to the debt ceiling. The debt ceiling had technically been reached on $ecember .1, 2012, when the Treasury $epartment commenced <e)traordinary measures< to enable the continued financing of the government. The debt ceiling is part of a law 3Title .1 of the *nited (tates 9ode, section .1014 created by 9ongress. 'ccording to the #overnment 'ccountability ffice, <The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. /ather, it is a limit on the ability to pay obligations already incurred.< It does not prohibit 9ongress from creating further obligations upon the *nited (tates. The ceiling was last set at K1D.? trillion in 2011.

n 0anuary 1C, 201., !itch /atings warned that delays in raising the debt ceiling could result in a formal review of its credit rating of the *.(., potentially leading to it being downgraded from '''. !itch cautioned that a downgrade could also result from the absence of a plan to bring down the deficit in the medium term. 'dditionally, the company stated that <In !itch6s opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline.< De)! ceilin" sus#ension In mid70anuary, %aul /yan, 9hairman of the 8ouse 5udget 9ommittee, floated the idea of a short7term debt ceiling increase. 8e argued that giving Treasury enough borrowing power to postpone default until mid7,arch would allow /epublicans to gain an advantage over bama and $emocrats in debt ceiling negotiations. This advantage would be due to the fact that postponing default until mid7,arch would allow for a triple deadline to be in ,arch> the se&uester on ,arch 1, the default in the middle of the month, and the e)piration of the current continuing resolution and the resulting federal government shutdown on ,arch 2=. This was supposed to provide e)tra pressure on the (enate and the %resident to work out a deal with the /epublican7led 8ouse. (hortly after that, the 8ouse learned that the (enate had not passed an independent budget plan since 'pril 2009. 8ouse /epublicans &uickly came up with an idea that would suspend the debt ceiling enough to allow time for both chambers of 9ongress to pass a budget. n !ebruary ?, 201., %resident bama signed into law the <"o 5udget, "o %ay 'ct of 201.<, which suspended the *.(. debt ceiling through ,ay 1+, 201.. The bill was passed in the (enate one week previously by a vote of D?7.?, with all <no< votes from /epublican senators, who were critical of the lack of spending cuts that accompanied an increase in the limit. In the 8ouse, the bill passed the week before by a vote of 2+C71??, with both parties voting in favor. In the 8ouse a provision was attached by /epublican representatives that mandates the temporary withholding of pay to members of 9ongress if they do not produce a budget plan by 'pril 1C. %ay would be reinstated once a budget was passed or on 0anuary 2, 201C, whichever came first. *nder the law, the debt ceiling would be set on ,ay 19, 201. to a level <necessary to fund commitment incurred by the !ederal #overnment that re&uired payment.< De&elo#men!s durin" sus#ension n ,arch 1, the se&uester, cutting K1.2 trillion over the ne)t decade, went into effect after

the parties failed to reach a deal.

n ,arch 21, the 8ouse passed a !L 201? budget that would

balance the *nited (tates budget in 202.. This was a shorter period than envisaged in their 201. budget, which balanced in 20.C, and the 2012 budget, which balanced in 20D.. It passed the 8ouse on a mostly party7line 221720= vote. 8owever, later that day, the (enate voted C97?0 to re;ect the 8ouse /epublican budget. n ,arch 2., the (enate passed its own 201? budget on a C07?9 vote. The 8ouse refused to hold a vote on the (enate budget. n 'pril 10, the %resident released his own 201? budget, which was not voted on in either house of 9ongress. Throughout ,arch and 'pril, there were several developments that reduced the se&uester6s impact. The bill that e)tended the government6s continuing resolution to (eptember .0 lessened the se&uester6s effect on defense, and later bills removed furloughs for air traffic control and food service industries. De)! ceilin" reac+ed a"ain n ,ay 19, the debt ceiling was reinstated at ;ust under K1D.= trillion to reflect borrowing during the suspension period. 's there was no provision made for further commitments after the ceiling6s reinstatement, Treasury began applying e)traordinary measures once again. $espite earlier estimates of late 0uly, Treasury announced that default would not happen <until sometime after @abor $ay<. "ovember. n 'ugust 2D, 201., Treasury informed 9ongress that if the debt ceiling was not raised in time, the *nited (tates would be forced to default on its debt sometime in mid7 ctober. n (eptember 2C, Treasury announced that e)traordinary measures would be e)hausted no later than ctober 1=, leaving Treasury with about K.0 billion in cash, plus incoming revenue, but no estimated that the e)act date on which Treasury would have ability to borrow money. The 95 ther organi-ations, including the 9ongressional 5udget ctober or possibly ffice 395 4, pro;ected e)haustion of the e)traordinary measures in

had to begin prioriti-ingMdelaying bills andMor actually defaulting on some obligations would fall between ctober 22 and "ovember 1. Resolu!ion n ctober 1D, the (enate passed the 9ontinuing 'ppropriations 'ct, 201?, a continuing resolution, to fund the government until 0anuary 1C, 201?, and suspending the debt ceiling until !ebruary =, 201?, thus ending both the *nited (tates federal government shutdown of 201. and the *nited (tates debt7ceiling crisis of 201..

It set up a 8ouse7(enate budget conference to negotiate a long7term spending agreement, and strengthened income verification for subsidies under the %atient %rotection and 'ffordable 9are 'ct. The (enate vote was +171+ in favor, with 1 member absent due to illness. The 8ouse passed the bill unamended later that day, by a vote of 2+C71??, with . members absent due to illness. The %resident signed the bill early the ne)t morning on returning to work on ctober 1=. n 0anuary 1?, 201?, the 8ouse and the (enate 'ppropriations 9ommittees agreed on a spending plan that would fund the federal government for two years. ' bill e)tending the previous continuing resolution through 0anuary 1+ was also passed. n 0anuary 1D, 201?, 9ongress passed a K1.1 trillion appropriations bill that will keep the federal government funded until ctober 201?. %resident bama signed the appropriations bill into law on 0anuary 1+. n !ebruary =, 201?, the debt limit suspension e)pired and treasury began applying e)traordinary measures once again, warning that such measures would not last beyond !ebruary 2= due to large ta) refunds that would need to paid during !ebruary. n !ebruary 11th, after finding insufficient support for various conditions for increasing the debt ceiling, the house passed a bill suspending the debt ceiling without conditions through ,arch 1C, 201C. The senate passed the bill unamended on !ebruary 12, 201?, and it was signed by the president on !ebruary 1Cth. T+ree Solu!ions To T+e De)! Crisis T+a! Don6! Require Raisin" T+e De)! Ceilin" 5ased on the following premises> 1. The national debt is not an obligation to pay valueH it is an obligation to pay money. 2. The government has the authority to create unlimited money out of thin air. The !ederal /eserve was created by the government, and derives its authority to create unlimited money from the government. .. The government can make, change or ignore any rule they want as long as they declare national security. There are at least three ways for congress to Npay their bills on timeO and not become Na deadbeat nationO that donPt re&uire borrowing any more money and would spare the 'merican people another crisis over the debt ceiling. Infla!ion 3i!+ou! ne"a!i&e consequences ctober 1=. *nder the resolution, the debt ceiling debate and partial government shutdown were postponed, with federal workers

NInflation is bad because it raises the price of goods and servicesO, but the price increase is offset by the fact that therePs more money available to buy these goods and services in the first place. N5ut inflation is bad because it devalues the moneyQO but therePs more devalued money than there was before, so the overall value in the economy stays the same. ItPs called e&uilibrium. Infla!ion 3i!+ #osi!i&e effec!s It may be difficult to know how much money to send everybody if you donPt have a way of knowing e)actly how much they have. 5ut if you have a rough idea of how many dollars there are in e)istence, then it would be easy to think of everybody as a single sum of money for the purposes of the formula, then divide the result by the number of people and pay everyone that same amount. De)! for"i&eness &ia Na!ional Securi!* If the government became insolvent during an economic depression and could no longer pay welfare and social security, the 'merican people might become so poor and hungry that it might cause riots, which would make us vulnerable to terrorism. Therefore, if the government can declare national security to override the 9onstitution, then the government can also declare national security to forgive their own debt. 8ence it can be said that the government has other choices. They donPt have to increase the national debt in order to avoid default. They want to raise the national debt and theyPre using default as an e)cuse. It is never in anybodyPs interest to owe somebody else if it can be helped, because the borrower becomes servant to the lender. Therefore the national debt, and the governmentPs inevitable default, is both proof of the infiltration. 4OSSI1LE SOLUTIONS: Re&ersin" !+e Trend: Some Su""es!ions for Ac!ion 'ccess to markets must be conditioned on a strategic analysis of our own national needs first and foremost. 's things stand, sovereign rights to be handed to domestic markets to international bodies like the 2orld Trade rgani-ation and are committed to disastrous None7way free tradeO agreements such as Jalue 'dded Ta) regulations and "'!T'. 2e are in a dramatically different position from emerging low7wage markets. The policies should carefully protect the wealth and resources rather than simply provide the lowest consumer cost regardless of the impact on the industries and workers. %romoting open markets and economic growth abroad will not alone rebalance 'mericaPs trade accounts and domestic industrial collapse. ur industries have been so

disarmed and dismantled and hence now there is a lack of knowledge, capacity, and investment capital to facilitate self 7sustaining production. 7e* Solu!ions $rastic action is needed to restore the economic and financial independence and must begin immediately to rebuild industries. The first essential is that government should ensure that it is once again profitable to produce most goods and services in 'merican factories employing 'merican workers. %olicies must be established that prevent other countries from hindrances to *(. The sale of key assets to foreign entities has to be halted. It is also a must to close opportunities for foreign corporations to compete unfairly against the homeindustries. Immediate move to curb out7of 7control spending on unnecessary programs and initiatives that are being financed by foreign debt is also necessary. Instituting policies to cut back consumption and particularly consumption of imported products are to be considered. Individuals and companies are to be allowed to make profit by selling out the *nited (tates. The stimulation for new policies must come directly from the broad 'merican public. Joters must use all reasonable methods to pressure elected officials. 2ithout direct and immediate action, there will soon be little left to save. Defense Industries, assets, resources, and companies need to be protected from foreign countries and corporations seeking to gain control of key industrial processes and technologies. This would include preventing the sale of strategic *( domestic companies to foreign companies and eliminating off shore outsourcing e)cept in e)treme circumstances. 0air Trade The trade treaties should protect the country from predatory foreign countries and companies seeking to weaken or destroy 'merican industry. Tariffs should be erected where needed and where practical. 1)perience has shown that it is f utile to e)pect other countries to adopt our policies on, f or instance, f air and free competition. The most obvious tool is tariffs on their e)ports. Domes!ic Indus!r* Com#e!i!i&eness In addition to establishing protection for industry and country, companies with the national interest should be properly aligned by changing the incentive system within which they operate. The ta) structure should be changed to encourage industrial revival, particularly in industries

which have been hit worst by unfair foreign competition.

ne simple but highly effective

measure would be to shorten the depreciation schedules on capital investment and research spending. ,eanwhile capital gains ta)es should be increased to discourage short7term thinking and reduce the incentive f or entrepreneurs to cash out. Su""es!ions: R 'ppointing an economic minister, a ma;or cabinet post, to develop an industrial policy that would> 1. 9reate conditions to make manufacturing competitive and profitable through ta) changes and subsidies where needed. 2. %rotecting economy from foreign predatory practices. .. 9reating an industrial research and development division similar to government sponsored "ational Institute of 8ealth 3"I84 in medicine or the 'pollo pro;ect. R 9hanging the ta) structure for selecting industries that are vital to strategic 'merican interests B steel, transportation, cement and others. R 9ontrolling the balance of trade deficit. The ma;ority of this money leaves the economy and never returns. The money that does return is the means through which foreign companies are able to accumulate funds to purchase the best companies. R 'mending or getting out of the agreement with the 2T . It places the domestic trade laws in the hands of an undemocratic organi-ation whose decisions have been consistently and unfairly ad;udicated. R 1liminating the foreign Jalue 'dded Ta) 3J'T4 discrepancy. It un;ustifiably subsidi-es foreign e)ports, while simultaneously penali-ing the e)ports to them. R !aster depreciation on capital e&uipment investment B it will lessen the need to outsource manufacturing. R !ree trade has been a disaster. It must be replaced with intelligent trade that prevents foreign predatory practices and better serves *.(. interests. T+e Euro8one economic crisis causes and solu!ions: The 1uro-one crisis is an ongoing financial crisis that has made it difficult or impossible for some countries in the euro area to repay or re7finance their government debt without the assistance of third parties. %ublic debt K and E#$% 320104 for selected 1uropean countries #overnment debt of 1uro-one, #ermany and crisis countries compared to 1uro-one #$%. The

1uropean sovereign debt crisis resulted from a combination of comple) factors, including the globalisation of financeH easy credit conditions during the 2002B200+ period that encouraged high7risk lending and borrowing practicesH the 200=B2012 global financial crisisH international trade imbalancesH real7estate bubbles that have since burstH the 200+B2012 global recessionH fiscal policy choices related to government revenues and e)pensesH and approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socialising losses. ne narrative describing the causes of the crisis begins with the significant increase in savings available for investment during the 2000B200= period when the global pool of fi)ed7 income securities increased from appro)imately K.D trillion in 2000 to K=0 trillion by 200=. This <#iant %ool of ,oney< increased as savings from high7growth developing nations entered global capital markets. Investors searching for higher yields than those offered by *.(. Treasury bonds sought alternatives globally. The temptation offered by such readily available savings overwhelmed the policy and regulatory control mechanisms in country after country, as lenders and borrowers put these savings to use, generating bubble after bubble across the globe. 2hile these bubbles have burst, causing asset prices 3e.g., housing and commercial property4 to decline, the liabilities owed to global investors remain at full price, generating &uestions regarding the solvency of governments and their banking systems. Risin" +ouse+old and "o&ernmen! de)! le&els In 1992, members of the 1uropean *nion signed the ,aastricht Treaty, under which they pledged to limit their deficit spending and debt levels. 8owever, a number of 1* member states, including #reece and Italy, were able to circumvent these rules, failing to abide by their own internal guidelines, sidestepping best practice and ignoring internationally agreed standards. This allowed the sovereigns to mask their deficit and debt levels through a combination of techni&ues, including inconsistent accounting, off7balance7sheet transactions as well as the use of comple) currency and credit derivatives structures.

The comple) structures were designed by prominent *.(. investment banks, who received substantial fees in return for their services. The adoption of the euro led to many 1uro-one countries of different credit worthiness receiving similar and very low interest rates for their bonds and private credits during years preceding the crisis. 's a result, creditors in countries with originally weak currencies 3and higher interest rates4 suddenly en;oyed much more favourable credit terms, which spurred private and government spending and led to an economic boom. In some countries such as Ireland and (pain low interest rates also led to a housing bubble, which burst at the height of the financial crisis. 9ommentators such as 5ernard The average fiscal deficit in the euro area in 200= was only 0.DE before it grew to =E during the financial crisis. In the same period, the average government debt rose from DDE to +?E of #$%. #overnment6s mounting debts are a response to the economic downturn as spending rises and ta) revenues fall, not its cause. #overnment deficit of 1uro-one compared to *(' and *: 1ither way, high debt levels alone may not e)plain the crisis. The budget deficit for the euro area as a whole is much lower and the euro area6s government debtM#$% ratio of +DE in 2010 was about the same level as that of the *(. ,oreover, private7sector indebtedness across the euro area is markedly lower than in the highly leveraged 'nglo7(a)on economies. Trade im)alances $uring the crisis, from 1999 to 200=, #ermany had a considerably better public debt and fiscal deficit relative to #$% than the most affected euro-one members. In the same period, these countries 3%ortugal, Ireland, Italy and (pain4 had far worse balance of payments positions.

2hereas #erman trade surpluses increased as a percentage of #$% after 1999, the deficits of Italy, !rance and (pain all worsened. ' trade deficit can also be affected by changes in relative labour costs, which made southern nations less competitive and increased trade imbalances. (ince 2001, Italy6s unit labour costs rose .2 E relative to #ermany6s. #reek unit labour costs rose much faster than #ermany6s during the last decade. 8owever, most 1* nations had increases in labour costs greater than #ermany6s. Those nations that allowed <wages to grow faster than productivity< lost competitiveness. #ermany6s restrained labour costs, while a debatable factor in trade imbalances, are an important factor for its low unemployment rate. ,ore recently, #reece6s trading position has improvedH in the period 2011 to 2012, imports dropped 20.9E while e)ports grew 1D.9E, reducing the trade deficit by ?2.+E.

S!ruc!ural #ro)lem of Euro8one s*s!em There is a structural contradiction within the euro system, namely that there is a monetary union 3common currency4 without a fiscal union 3e.g., common ta)ation, pension, and treasury functions4. In the 1uro-one system, the countries are re&uired to follow a similar fiscal path, but they do not have common treasury to enforce it. That is, countries with the same monetary system have freedom in fiscal policies in ta)ation and e)penditure. (o, even though there are some agreements on monetary policy and through the 1uropean 9entral 5ank, countries may not be able to or would simply choose not to follow it. This feature brought fiscal free riding of peripheral economies, especially represented by #reece, as it is hard to control and regulate national financial institutions. !urthermore, there is also a problem that the 1uro-one system has a difficult structure for &uick response. 1uro-one, having 1= nations as its members, re&uire unanimous agreement for a decision making process. This would lead to failure in complete prevention of contagion of other areas, as it would be hard for the 1uro-one to respond &uickly to the problem. In addition, as of 0une 2012 there was no <banking union< meaning that there was no 1urope7wide approach to bank deposit insurance, bank oversight, or a ;oint means of recapitalisation or resolution 3wind7down4 of failing banks. 5ank deposit insurance helps avoid

bank runs. /ecapitalisation refers to in;ecting money into banks so that they can meet their immediate obligations and resume lending, as was done in 200+ in the *.(. via the Troubled 'sset /elief %rogramme. Mone!ar* #olic* infle9i)ili!* ,embership in the 1uro-one established a single monetary policy, preventing individual member states from acting independently. In particular they cannot create 1uros in order to pay creditors and eliminate their risk of default. (ince they share the same currency as their 3euro-one4 trading partners, they cannot devalue their currency to make their e)ports cheaper, which in principle would lead to an improved balance of trade, increased #$% and higher ta) revenues in nominal terms. In the reverse direction moreover, assets held in a currency which has devalued suffer losses on the part of those holding them. Loss of confidence (overeign 9$( prices of selected 1uropean countries 32010B201.4. The left a)is is in basis pointsH a level of 1,000 means it costs K1 million to protect K10 million of debt for five years. %rior to development of the crisis it was assumed by both regulators and banks that sovereign debt from the 1uro-one was safe. 5anks had substantial holdings of bonds from weaker economies such as #reece which offered a small premium and seemingly were e&ually sound. 's the crisis developed it became obvious that #reek, and possibly other countries6, bonds offered substantially more risk. 9ontributing to lack of information about the risk of 1uropean sovereign debt was conflict of interest by banks that were earning substantial sums underwriting the bonds. The loss of confidence is marked by rising sovereign 9$( prices, indicating market e)pectations about countries6 creditworthiness. !urthermore, investors have doubts about the possibilities of policy makers to &uickly contain the crisis. (ince countries that use the euro as their currency have fewer monetary policy choices 3e.g., they cannot print money in their own currencies to pay debt holders4, certain solutions re&uire multi7national cooperation. !urther, the 1uropean 9entral 's of 0une, 2012, many 1uropean banking systems were under significant stress, particularly (pain. ' series of <capital calls< or notices that banks re&uired capital contributed to a free-e in funding markets and interbank lending, as investors worried that banks might be hiding losses or were losing trust in one another. In 0une 2012, as the euro hit new lows, there were reports that the wealthy were moving assets out of the 1uro-one and within the 1uro-one from the (outh to the "orth. 5etween 0une 2011 and 0une 2012 (pain and Italy alone have lost 2+D bn and 2.C bn

euros. 'ltogether ,editerranean countries have lost assets worth ten per cent of #$% since capital flight started in end of 2010. ,ario $raghi, president of the 1uropean 9entral 5ank, has called for an integrated 1uropean system of deposit insurance which would re&uire 1uropean political institutions craft effective solutions for problems beyond the limits of the power of the 1uropean 9entral 5ank. n C $ecember 2011, (G% placed its long7term sovereign ratings on 1C members of the euro-one on <9redit2atch< with negative implicationsH (G% wrote this was due to <systemic stresses from five interrelated factors> 1: Tightening credit conditions across the euro-oneH 24 ,arkedly higher risk premiums on a growing number of euro-one sovereigns including some that are currently rated 6'''6H .4 9ontinuing disagreements among 1uropean policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among euro-one membersH ?4 8igh levels of government and household indebtedness across a large area of the euro-oneH and C4 The rising risk of economic recession in the 1uro-one as a whole in 2012. 9urrently, we e)pect output to decline ne)t year in countries such as (pain, %ortugal and #reece, but we now assign a ?0E probability of a fall in output for the euro-one as a whole.< SOLUTIONS 0OR EUROZONE CRISIS: Euro#ean fiscal union Increased 1uropean integration giving a central body increased control over the budgets of member states was proposed on 0une 1?, 2012 by 0ens 2eidmann %resident of the $eutsche 5undesbank, e)panding on ideas first proposed by 0ean79laude Trichet, former president of the 1uropean 9entral 5ank. 9ontrol, including re&uirements that ta)es be raised or budgets cut, would be e)ercised only when fiscal imbalances developed. This proposal is similar to contemporary calls by 'ngela ,erkel for increased political and fiscal union which would <allow 1urope oversight possibilities.< Euro#ean )an$ reco&er* and resolu!ion au!+ori!* 1uropean banks are estimated to have incurred losses approaching S1 trillion between the outbreak of the financial crisis in 200= and 2010. The 1uropean 9ommission approved some S?.C trillion in state aid for banks between ctober 200+ and ctober 2011, a sum which includes the value of ta)payer7funded recapitali-ations and public guarantees on banking debts. This has prompted some economists such as 0oseph (tiglit- and %aul :rugman to note that 1urope is not

suffering from a sovereign debt crisis but rather from a banking crisis. n D 0une 2012, the 1uropean 9ommission adopted a legislative proposal for a harmoni-ed bank recovery and resolution mechanism. The proposed framework sets out the necessary steps and powers to ensure that bank failures across the 1* are managed in a way which avoids financial instability. The new legislation would give member states the power to impose losses, resulting from a bank failure, on the bondholders to minimi-e costs for ta)payers. The proposal is part of a new scheme in which banks will be compelled to Nbail7inO their creditors whenever they fail, the basic aim being to prevent ta)payer7funded bailouts in the future. The public authorities would also be given powers to replace the management teams in banks even before the lender fails. 1ach institution would also be obliged to set aside at least one per cent of the deposits covered by their national guarantees for a special fund to finance the resolution of banking crisis starting in 201+.

Euro)onds ' growing number of investors and economists say 1urobonds would be the best way of solving a debt crisis, though their introduction matched by tight financial and budgetary coordination may well re&uire changes in 1* treaties. n 21 "ovember 2011, the 1uropean 9ommission suggested that eurobonds issued ;ointly by the 1= euro nations would be an effective way to tackle the financial crisis. *sing the term <stability bonds<, 0ose ,anuel 5arroso insisted that any such plan would have to be matched by tight fiscal surveillance and economic policy coordination as an essential counterpart so as to avoid moral ha-ard and ensure sustainable public finances. #ermany remains largely opposed at least in the short term to a collective takeover of the debt of states that have run e)cessive budget deficits and borrowed e)cessively over the past years, saying this could substantially raise the country6s liabilities. Euro#ean Mone!ar* 0und n 20 ctober 2011, the 'ustrian Institute of 1conomic /esearch published an article that suggests transforming the 1!(! into a 1uropean ,onetary !und 31,!4, which could provide governments with fi)ed interest rate 1urobonds at a rate slightly below medium7term economic growth 3in nominal terms4. These bonds would not be tradable but could be held by investors

with the 1,! and li&uidated at any time. #iven the backing of all euro-one countries and the 195 <the 1,* would achieve a similarly strong position vis7a7vis financial investors as the *( where the!ed backs government bonds to an unlimited e)tent.< To ensure fiscal discipline despite lack of market pressure, the 1,! would operate according to strict rules, providing funds only to countries that meet fiscal and macroeconomic criteria. #overnments lacking sound financial policies would be forced to rely on traditional 3national4 governmental bonds with less favorable market rates. The econometric analysis suggests that <If the short7term and long7 term interest rates in the euro area were stabili-ed at 1.CE and .E, respectively, aggregate output 3#$%4 in the euro area would be C percentage points above baseline in 201C<. 't the same time sovereign debt levels would be significantly lower with, e.g., #reece6s debt level falling below 110E of #$%, more than ?0percentage points below the baseline scenario with market based interest levels. !urthermore, banks would no longer be able to unduly benefit from intermediary profits by borrowing from the 195 at low rates and investing in government bonds at high rates. Dras!ic de)! 3ri!e(off financed )* 3eal!+ !a9 O&erall de)! le&els in %55; and 3ri!e(offs necessar* in !+e Euro8one< U7 and U S !o reac+ sus!aina)le "rounds 'ccording to the 5ank for International (ettlements, the combined private and public debt of 1+ 19$ countries nearly &uadrupled between 19+0 and 2010, and will likely continue to grow, reaching between 2C0E 3for Italy4 and about D00E 3for 0apan4 by 20?0. ' 5I( study released in 0une 2012 warns that budgets of most advanced economies, e)cluding interest payments, <would need 20 consecutive years of surpluses e)ceeding 2 per cent of gross domestic product 7 starting now 7 ;ust to bring the debt7to7#$% ratio back to its pre7crisis level<. The same authors found in a previous study that increased financial burden imposed by aging populations and lower growth makes it unlikely that indebted economies can grow out of their debt problem if only one of the following three conditions is met.

government debt is more than +0 to 100 percent of #$%H non7financial corporate debt is more than 90 percentH

private household debt is more than +C percent of #$%.

The first condition, which was suggested by an influential paper written by :enneth /ogoff G 9armen /einhart has been disputed due to ma;or calculation errors. In fact, the average #$% growth at public debtM#$% ratios over 90 percent is not dramatically different than when debtM#$% ratios are lower. The 5oston 9onsulting #roup 359#4 added to the original finding that if the overall debt load continues to grow faster than the economy, then large7scale debt restructuring becomes inevitable. To prevent a vicious upward debt spiral from gaining momentum the authors urge policy makers to <act &uickly and decisively< and aim for an overall debt level well below 1+0 percent for the private and government sector. This number is based on the assumption that governments, nonfinancial corporations, and private households can each sustain a debt load of D0 percent of #$%, at an interest rate of C percent and a nominal economic growth rate of . percent per year. @ower interest rates andMor higher growth would help reduce the debt burden further. To reach sustainable levels the 1uro-one must reduce its overall debt level by SD.1 trillion. 'ccording to 59# this could be financed by a one7time wealth ta) of between 11 and .0 percent for most countries, apart from the crisis countries 3particularly Ireland4 where a write7off would have to be substantially higher. The authors admit that such programs would be <drastic<, <unpopular< and <re&uire broad political coordination and leadership< but they maintain that the longer politicians and central bankers wait, the more necessary such a step will be. Instead of a one7time write7off, #erman economist 8arald (pehl has called for a .07year debt7reduction plan, similar to the one #ermany used after 2orld 2ar II to share the burden of reconstruction and development. (imilar calls have been made by political parties in #ermany including the #reens and The @eft.