Take interest in the bonds that hold us together
One of the apt remarks attributed to the British Prime Minister Harold MacMillan is that there is no time so distant as the day before yesterday. It feels only that long since Bill Clinton was president of the US, but what a distant era it now seems.
For part of the Clinton years, the US federal government ran a surplus, tax revenues exceeded spending. Such is the way with trends that many learned folk at the time saw no reason why there should not be a permanent US budget surplus, and now it is an impossible dream.
More relevant to our present predicament is one curious effect from the prospect of US surpluses. Economists worried that the financial system might grind to a halt. If the US was not borrowing, it would not have to issue any fresh bonds, the "IOUs" which governments give to people who lend them money, whether through the debt market or the post office, promising a fixed rate of interest and repayment on a certain date.
This huge stock of bonds, around $85trn, representing the total of the national debts of all the countries issuing tradeable bonds, is the staple of the financial system. Banks, pension funds and insurance companies all need bonds to provide safe income, and, possibly, capital gains.
Since the stock of savings grows as global income expands, more bonds are needed to satisfy demand. The system could not afford to have the US Government running surpluses.
Well, there is no danger of that today. Instead, the opposite danger threatens. The long war of attrition between Democrats and Republicans is casting doubt on the ability of the US ever to reduce the deficit to sustainable levels.
It may be part of a more fundamental doubt, that the great ingenious bond machine, where governments borrow, not just because they want to, but because the savers need to lend to them, is itself under threat. What happens if there are not enough willing savers to fund all the government deficits, amounting to around €5trn a year?
The governments of the eurozone face an intractable dilemma. The flight to safety means the German core can borrow 10-year money at 3%. Equalising eurozone risk would mean higher rates for them. Yet, if investors turn their backs on the bonds of Italy and Spain, the whole system could crash, just as it did in 2008, but perhaps worse.
This would be a cruel irony for Ireland. The bailout means they do not have to worry about the bond markets until 2013 at the earliest. The new one already has an upside, with the ECB dropping talk of an increase in general interest rates, and offering easier loans to the banks.
A genuine solution to the euro problem is bound to benefit the smaller members, but it could all go horribly the other way.