Do our leaders know that the deficit is NOT unsustainable?

[dkf]

10. There are obviously economic theories on why this is so, but some food for thought:

Rogoff: When we started writing our book, we thought we would find that there were financial crises in Asia, Europe, the U. S. and elsewhere. What we hadn't quite anticipated was how similar these crises would be. It just shocked us, because these areas have different legal systems and different institutions. Carmen mentioned human nature. It is almost as if these institutions and these legal systems were forms of clothing and makeup, but inside the person is the same.

And

Rogoff: And, lastly, other things, like infrastructure and education spending, are important. This isn't all about austerity versus no austerity. Countries that are successful in dealing with these crises, such as Sweden, sometimes take them as an opportunity to change. We haven't.

http://online.barrons.com/article/SB50001424052748703961304578128861988425802.html#articleTabs_article%3D2

This is interesting too:

http://www.eurotrib.com/story/2011/2/26/4032/30282

I'm reading Reinhart's and Rogoff's This Time is Different, which is jam-packed with information about the economic history of defaults.

In it, there's a neat little box documenting the fact that no, countries don't actually grow out of debt.

To identify episodes of large debt reversals for middle- and low-income countries over the period 1970-2000, Reinhart, Rogoff, and Savastano selected all episodes in which the ratio of external debt to GNP fell 25 percentage points or more within any three-year period, then ascertained whether the decline in the ratio was caused by a decrease in the numerator, an increase in the denominator, or some combination of the two.

Of the twenty-two debt reversals detected in middle-income countries with emerging markets, fifteen coincided with some type of default or restructuring of external debt obligations. In six of the seven episodes that did not coincide with a credit event, the debt reversal was effected mainly through net debt repayments; in only one of the episodes (Swaziland, 1985) did the debt ratio decline principally because the country "grew" out of its debts! Growth was also the principal factor explaining the decline in debt ratios in three of the fifteen default or restructuring cases: those of Morocco, Panama, and the Philippines. Overall, this exercise shows that countries typically do not grow out of their debt burden, providing yet another reason to be skeptical of overly sanguine standard sustainability calculations for debt-intolerant countries.

Yes these are middle-income countries so its not apples to apples but fascinating anyway.