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Former Fed Economist: Financially the US Government May Actually Be in Worse Shape Than Greece

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The whole world is watching Greece and while everyone is worried about the debt contagion spreading, the United States is in the middle of its own fiscal mess. "Kicking the can" has been used so many times that if the U.S. government could cash in every time it was used, the country would be able to pay off its deficit and have a surplus.

The sovereign debt problem is a reoccurring one. Seems now the sovereign debt cycle is hitting its peak. Band aid upon band aid have been applied to Greece and when the bandage starts to fall off, slap- another one is put on to prevent the wound from festering. One of my economist contacts told me it's like a "fiscal groundhog day" where every 12-18 months we'll be seeing the same images in Greece because these decisions are not addressing the real problem.

I decided to ask Arnold Kling, Former economist at the Federal Reserve and at Freddie Mac. his thoughts on this sovereign debt crisis. Kling is now an Affiliated Scholar at the Mercatus Center at George Mason University.

LL: Isn't this deal just delaying a Greece default down the road? Some say a default is inevitable.

Kling: There are scenarios under which a default does not occur. One scenario is that private investors come to have confidence that Greece really means to shrink its primary deficit in relation to gdp. Another scenario is that multinational lending institutions, such as the ECB and IMF, decide to prop up Greece, regardless of the cost.

LL: 80 percent of the people in greece are dependent on the government, 20 percent of americans are dependent on the government. Just how similar are the US and Greece?

Kling: Financially, the US government may actually be in worse shape.

The U.S. Debt-to-gdp ratio may be higher than that in Greece, taking into account problems with the states, the pension benefit guaranty corporation, and future growth in entitlement spending.

However, the american people are likely to be more receptive to reductions in government spending. The U.S. Does not have a significant populist/socialist movement. On the contrary, it has the Tea Party movement, which is a populist/anti-socialist movement.

LL: Isn't the only way to fix Greece's fiscal house is through a structured default?

Kling: Many economists believe that. But default is hardly a panacea.

Greece needs to fund its government, and without access to credit markets that will be difficult. A default might result in at least as much austerity as an agreement with the imf.

Those experts who say that a default will be a solution are assuming that the default take place as part of an orderly negotiation, so that either private-sector lenders or international institutions are willing to renew lending to greece once the debt has been restructured. But if greece undertakes a unilateral default, it will be faced with as much austerity, or more, than what the imf is proposing.

Thus, the question about whether a default is a better option is really a political question. Would a default be easier to negotiate than an agreement with the IMF? That's a difficult question to answer.

LL: Are you worried about a trigger effect that could spark another global credit crisis?

Kling: Yes. It is likely that some european banks are exposed to a default by greece. If banks lose confidence in one another, then we are back in a crisis situation.

LL: Greece is key to what happens to other countries. Can we see this spread to other countries like Portugal?

Kling: This is a very subtle psychological and political issue. If the greek government falls, then the signal to portugal becomes, "do not agree to imf conditions. That is suicide." on the other hand, if the government survives, that strengthens the hand of the imf in negotiating with other countries.

LL: How much will this austerity slow economic growth and income?

Kling: I think austerity is much harder on the political prospects of the government than it is on the economic prospects of a country as a whole. Politically stable countries, like canada and sweden, have cut back on government extravagance without adverse economic consequences.

Politically unstable countries, like argentina, have a harder time.

A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."

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