Too Complex to Fail? Debt and Modern Government

You are, I've often been told, supposed to write about things you understand. Which is why I should not be writing about the ongoing financial crisis: I can't understand what's happening. From an outsider's perspective, it certainly seems like the numbers don't add up. Our national debt is building at an unfathomable rate. Greece just required a bailout of over a hundred billion dollars, and most experts seem skeptical that it was enough. The nations of the developed world all have massive amounts of public and private debt. (Check out this page on 'external debt' if you want your mind blown.)

I have generally taken it as a given that the bankers who lend money know what they are doing, and despite an amount of debt that frankly seems impossible to pay back, there must be enough corresponding assets that it would all work out. After all, we generally compare debt to annual GDP output, but there are many past years of wealth built up that could pay off debt in a crisis.

However, these two posts by David Goldman have forced me to start thinking that our elected officials, rather than confront the crisis of debt, have made a deal with the devil to keep government going the same way it always has without making anyone too uncomfortable. What we should be doing, in a common-sense world, is dramatically cutting spending and raising taxes to pay for our profligate ways. But that would raise unemployment, make the recession worse, and get all the politicians thrown out of office. So they are instead letting bankers make a lot of money by borrowing from one branch of government and using the money to buy debt from another branch of government. This sounds an awful lot like money laundering: an illegitimate enterprise gives money to someone else for a legitimate use, then they pay back the criminals in clean money. Only in this case they are trying to hide the fact not that they made the money illegally, but that they made the money out of nothing: there's no wealth behind it, nothing but the guarantee of a country rapidly losing control of its finances.

At the risk of piling on too many metaphors, the whole thing feels like a NASCAR race where the cars keep going faster and faster. Eventually they're speeding so fast that it is obvious to everyone that the race has become unsafe. They need to slow down. But the cars are packed so close together, if anyone so much as taps the brakes, there will be a massive pileup. So everyone keeps accelerating, knowing they're just putting off the crash, hoping for some miracle to save them. We have so much debt, so much money moving around so fast, I don't think anyone really understands exactly what's going on. But I keep bracing myself for the moment when some big lender or country finally flinches, and taps on the brakes.