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The Global Debt Revolt

Tuesday, 9 Feb 2010 | 1:33 PM ET

I’m trying hard to remain optimistic about economic recovery here in America — and for that matter, around the world.

In my credo, optimism trumps pessimism every time. And, despite wayward anti-growth policies still pouring out of Washington, I still believe in the cyclical-recovery scenario here at home. But the growing debt problem in the U.S., Europe, and elsewhere is starting to sap confidence in the optimistic growth scenario. I have to keep my eyes open to this.

Here’s my thought: Sovereign-debt-default jitters out of southern Europe are spilling over into emerging markets around the world, and corporate-bond risk questions right here at home. There’s a contagion. So the big shots in the G7 meet in some godforsaken place in northern Canada and what do they do? What’s their solution?

More government spending.

Can you believe it? That was their pledge. No supply-side tax cuts that might generate growth and dissolve debt. Just more spending. I’ve never seen anything like it.

Look, the problem here isn’t just debt. The problem also lies underneath the debt. In other words, there are no tax-rate incentives to promote economic growth. That, of course, would help dissolve the debt.

European Central Bank head Jean-Claude Trichet says everything is going to be just fine and oh, by the way, Greece is going to get its debt-to-GDP ratio down to 3 percent in two years. Huh? What is he smoking? It’s now over 13 percent and the government unions are demonstrating in the streets to stop budget cuts.

You look at recent stock market turbulence and you clearly see that the investor revolt against debt continues. It’s a revolt against big-government spending and borrowing -- all of which will ultimately lead to much higher tax rates if not stopped. But “stop” is a word that no one seems to understand right now.

The financial revolt against big-government spend, borrow, and tax policies cannot be emphasized enough.

But there is a way out of this morass. The recipe is simple: smaller government, stricter spending limits, and lower, flatter tax rates to promote economic-growth incentives.

I don’t know why this is so hard. It’s the one thing the G7 and the U.S. have not yet tried. We need to quit this reliance on government and give primacy to free-enterprise entrepreneurs. Free them up. These are the people that create jobs and growth. That is the only tried and true growth solution.

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Questions? Comments, send your emails to: lkudlow@kudlow.com

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  • Lawrence Kudlow is a CNBC senior contributor. Previously, Kudlow was anchor of CNBC's prime-time program "The Kudlow Report"