LET’S assume a man has an income of $2000 per month. Let’s further assume that his income dropped by 50 per cent – he now has to manage on $1000 each month.
What would he do? Well, the logical assumption is that he would cut down on his expenses and manage.
Only a fool would suggest that he keep spending at the level he was when his income was $2000, and pay for it by borrowing.
This would bury him in a mountain of debt and after a while all his income would go on just the interest payments.
Surprisingly, when a country experiences financial problems, what so-called economics experts advise is that they continue to spend. Hell, they are even advised to increase their spending, and borrow to fund it.
There is never any talk of saving, reducing costs, and cutting one’s coat according to the cloth available.
Greece, for example, borrowed for a long time and, because its interest rates were low, people were able to take loans on very good terms, loans that they did not bother to repay. It was easy to keep up with the interest payments.
But Greece is not an island; it is part of the European Union and when interest rates went up, the debt burden became unbearable. It had to go, begging bowl in hand, to the EU and ask for help.
An austerity programme was prescribed but Greeks are not happy. They do not want cuts in many programmes that provide money to the people.
The IMF and the World Bank would prefer if Greece continued to borrow and spend. That’s the only thing these institutions know – spend your way out of trouble.
The US is the prime example of the fact that this does not work – with a national debt of some $US16 trillion that is growing by the minute, it would also be bankrupt if there was someone to force it to declare the facts.
Unlike Greece, which was pushed into a rescue plan by its EU partners, the US can decide its own economic policy. It has decided to keep interest rates close to zero and pump money into the economy by printing more and more.
When interest rates rise — they have to, if the US is serious about an economic recovery — then the inevitable crash will come and it will be ten times worse than what happened in 2008.