I think it is amazing how clueless people are regarding the current debt crisis.
People look at the debt and think that it is something ‘new’. They think Reagan started it and every President ever since made it worse. That is of course, a half truth. What people need to understand is that before Reagan we already had the same overspending problem. The only difference is that the Democratic machine was taxing and printing money like crazy (which is nothing but ‘mini’ defaults by the way) and that caused the runaway inflation crisis in the 70s. Reagan did change a few things and indeed controlled inflation and taxes. But the overall spending was simply shifted to debt.
What we are having now is the second large adjustment to the welfare state. The first one was mostly an accounting trick that resulted in some relief. That will not work again. The real problem needs to be addressed, and that is spending.
Europe is in an even worst situation since they added even more debt and a stupid union on top of it. So you might see people (Krugman) in the US still pushing the inflation ‘solution’ while in Europe that is not even an option anymore. Both places were hoping growth was the solution to reckless spending and that is simply not happening.
Italy already passed a balanced budget ammendment to its constitution. Expect more political battles in Europe and the US resulting in the same thing. The 2008 crisis caused the ‘unwinding’ of consumer debt. The current crisis is the unwinding of government debt. Taxes will eventually be raised but it is mathematically impossible to solve the issue without MAJOR cuts (debt deal was not even a down payment – it was a tip).
FDR is finally coming back to bite. Historians will look at 2008 as the opposite side of 1932 – we made a huge mistake as an excuse to solve one recession and now we are paying the price for it.