Glimmers of hope?
Countries can emerge from debt crises – so why not the US?
Our columns have been full of doom and gloom recently about the prospects for the US economy. But is there not a glimmer of hope? Isn’t Javier Milei turning Argentina around? Didn’t Greece pull out of its crisis successfully?
Or consider the case of Jamaica. Only a few years ago, it was on the edge of a financial breakdown. It had spent too much and borrowed too much. Lenders refused to provide more credit. Inflation was running riot. The currency was losing value. But Jamaica pulled up its socks and got to work.
Jamaica halved its government debt-to-GDP ratio from 144% between 2012 and 2023 by sustaining a primary surplus (an excess of revenues over spending, excluding interest payments) exceeding 7% of GDP for seven years. For reference, the US is currently operating with a budget deficit of about 6% of GDP. It was, according to an academic study quoted in the Financial Times, Jamaica’s “hard-won tradition of consensus building” that did the job. Somehow, the government was able to get nearly everyone to go along as it pulled the budget belt tighter.
Greece is another case (see also page 19). Greece’s public finances were absurdly mismanaged and notoriously corrupt. The government had been in almost continual default for the entire 19th century and much of the 20th century. It spent money it didn’t have, and then lied about its numbers so you couldn’t tell what was actually going on. But in 2009 it hit the Doomsday Trigger – with debt over 130% of GDP.
Under normal circumstances, people might not have extended it so much credit. But Goldman Sachs had helped it disguise its real situation so as to gain membership in the EU. As a member, it was able to borrow in a stable currency, the euro, and appeared to have the backing of Germany and France. Then, when the trouble began, the Germans protested: they didn’t want to bail out the lazy, profligate Greeks.
So, the Greeks did what they always did: they became the first developed nation ever to default on an IMF loan. There were riots, bank closures, chaos and turmoil. By 2011, Greece was in a depression, with GDP declining at a 7% rate. More than 100,000 companies went broke and the unemployment rate hit 23%. The debt-to
GDP ratio hit 177% in 2014. And by 2016, Greece seemed to be hitting bottom, with one out of three Greeks said to be living in poverty.
But Greece has been lucky. It could have bolted from Europe and told the IMF, the World Bank, and the EU to get lost. It could have gone back to its own currency, the drachma, as Paul Krugman advised, and gone on a bacchanalia of money-printing and hyperinflation. Instead, it buckled down, cut spending, raised taxes, fired deadbeat “public servants” and actually managed a budget surplus of about 4% of GDP. Its debt-toGDP ratio has come down from as much as 180% to 160%. It seems to be holding things together as it reduces its debt.
Sadly, it seems doubtful whether the US can learn very much from the experience of Jamaica and Greece. They are small countries – and their democracies work better. And, unlike the US, they were never able to borrow large amounts in a currency whose value they controlled. So they couldn’t “inflate away” their debts. As we have seen in recent columns, the main two things that bring down a great nation are war and debt. The US is not backing away from either of them.
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“The two things that bring down a nation are war and debt”