After Lehman Brothers fell, the scope of the financial crisis became so great that fiscal and monetary authorities throughout the world possessed the only balance sheets large enough to resolve the crisis.
In essence, the ills of the private sector were set to shift to the public sector. The sense at the time was that it would work; after all, the borrowing ability of the U.S. and the rest of the developed world were proven, and the ability of central banks to print money was and remains indisputable. Nevertheless, there was a sense of discomfort in the supposed solution.
In articles I wrote in 2008, I posed a question, calling it the question of our age: If the U.S. is backing its financial system, who is backing the U.S.? The basic premise rested on the idea that efforts to stabilize economies and markets looked likely to work if investors tolerated the additional debt the efforts required. If not, there would be financial Armageddon.
- More Economic Coverage ...
The direst outcome was of course avoided, but dark days have returned to some nations and are threatening to return to the world at large because the solutions themselves are being seen as a magic elixir that has morphed into poison.
Nations have reached, in other words, the Keynesian Endpoint, where there are no more balance sheets left to support either economic activity or the financial system. This is not literally true but true in practice because investors at the present time have no tolerance for either fiscal profligacy or the monetization of deficits by the world’s central banks.
Nations are left with old playbooks and fewer choices by which to resolve their respective problems. This means that time, devaluations and debt restructurings might be the only way out for many nations. It also means their citizenry will require politicians that can think outside of the box and act with greater unity and resolve than perhaps they are used to.
Tony Crescenzi is Senior VP, Strategist, Portfolio Manager Pimco. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."