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Busch: The Global Debt Dilemma

Apparently, the Greek government has called in the big hitters to help them with their fiscal dilemma. Joseph Stiglitz has been advising the government and his first analysis is to state that the austerity plan will likely stifle the country's growth. The 2001 Nobel Prize in Economics winner said that without balancing measures to stimulate the economy — such as development funds and other ways to increase liquidity — the deficit reduction could slow growth according to the WSJ.

"Slower growth could in turn lead to lower tax revenues and end up increasing the budget deficit. "I would give a strong cautionary note against deficit fetishism," Mr. Stiglitz told a news conference in Athens. "If you have less success [stimulating the economy through other means], then I start getting worried."

In essence, Greece's problems represent similar predicaments that other Western countries have: large deficit spending to stimulate/resuscitate economic growth. this is the modern interpretation of Keynesian economics.

Or is it?

Remember, Keynes didn't advocate running structural deficits to get the economy going (C+I+G+Ex-M=GDP) and thought they would chill rather than stimulate the economy.

In Fortune magazine, Carnegie Mellon's Allan Meltzer had this to say on the current US deficits, " Today, deficits are getting bigger and bigger with no plan to significantly lower them. Keynes understood what the current administration doesn't understand that the proper policy in a democracy recognizes that today's increase in debt must be paid in the future....We paid down wartime deficits. Now we have continuous deficits. We used to have a rule people believed in, balanced budgets. And now that's gone."

"The type of stimulus he (Keynes) advocated was very specific. He said it should be geared towards increasing private investment. He viewed private investment, as opposed to big government spending as the source of durable job creation." If Meltzer is correct, then both Greece and the United States need to focus on increasing private investment.

Therefore, a plan that contains increasing taxes on corporations or on capital creation is not what Keynes had in mind to stimulate private investment. At some point, nations will have to decide that they can't spend money on programs they can't afford. The recent discussions surrounding European and United States structural deficits has been prompted by a perceived crisis within the financial community over lack of credible plans and polices.

Stiglitz believes this fear is overdone and sees little chance of a default by Greece, United Kingdom, or United States. However, this doesn't mean that the problems are going to be solved easily. In Greece, it's cutting popular pension programs and government workers pay. In this country, the NYT on Sundayran a very helpful graph on the US budget deficit and debt. Although cutting earmarks and other spending is helpful, the conclusion is that cutting entitlement programs of Social Security, Medicare, and Medicaid is the key.

It would take strong leadership to bring these up for discussion and propose meetings in front of cameras for this purpose. Until this discussion occurs, debt holders will be left to speculate over the outcome of austerity measures that don't address the true issues.

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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.

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