With the mess of the U.S. economy, the European economy, and many other economies worldwide, I believe the biggest problem and the biggest threat to our standard of living is the banking situation.  Of course, it is the governments of the world, working hand in hand with the major banks, that have created this problem.

There is no question that government debt, central bank inflation, government spending, and regulations are a huge detriment to the economy and our standard of living.  These things will continue to create massive problems going forward.  But I see the major banks as the hardest problem to solve.

I have written about the FDIC before here and here.  There has been moral hazard created on a grand scale.  The crazy thing to me is that few libertarians will address this issue.  I think the reason is because it is almost impossible to address it while still sounding like a libertarian.  The government has created such huge problems that it will probably take the government to get out of it.  (Already, I can’t address this subject without sounding like I’m compromising my libertarian principles.)

If you became president and had a libertarian congress that would go along with you, what would you do to solve the banking problem from a libertarian perspective?

Moody’s just recently downgraded the rating status of several major banks.  I’m convinced that one significant event could trigger another scenario like we saw in 2008.  Most of the major banks are on the verge of insolvency.

I believe that is why the Fed has been holding back on QE3.  It has kept the monetary base fairly steady since the end of QE2, almost one year ago.  The Fed is keeping its powder dry until it really needs it.  Bernanke and company are not going to start QE3 just because the Dow Jones went down a few hundred points.  They are going to save QE3 for a major downturn and for another bank bailout.

Of course, if the government were to do things right, we would be in a far better situation today.  Let’s say that in 2008 the government and Fed bailed out the banks and other financial institutions just as they had.  But let’s also say that they withdrew all of the troops from around the world, saving hundreds of billions per year.  Let’s say they eliminated major departments like education and agriculture.  Let’s say that raised the age of Medicare and Social Security.  Let’s say they actually balanced the budget.  Let’s say there was no stimulus plan and no Obamacare.  If all of that government cutting had been done in tandem with the bank bailouts in 2008, we would at least be in a much better situation today and be in a better position to handle another banking crisis.

The FDIC and the Fed have created a moral hazard on an unprecedented scale.  I am clueless as a libertarian on how to get out of this without compromising libertarian principles.  Maybe the bad banks do need to be nationalized one time and then be sold off in parts.  Maybe the Fed needs to create just enough money to get all of the banks to 100% reserves and then set a 100% reserve requirement, both of which I am against for a free market.  Again, none of these are good libertarian solutions, but it is hard to come up with something better.

I suppose a true libertarian solution is to let the banks fail and not have the Fed or FDIC step in.  But even libertarians understand that this would be a complete disaster, particularly with the U.S. dollar being the only form of money used in most situations in America.  That means your checking account at the bank would be wiped out if you don’t get there in time.  I don’t think this “solution” would sit well with most Americans.

The one very libertarian thing that I am in favor of that would help this problem in the long run is to repeal legal tender laws.  It would put a check on Bernanke and the Fed from inflating too much.  And if they did inflate too much, at least people would have the choice of using another form of money.  If there ever were a hyperinflation scenario, at least there might be some kind of an alternative at that point.  As far as banking goes, maybe some banks would actually deal in gold and silver and would be less susceptible to a banking crisis.

In conclusion, the banks are in bad shape and the Fed knows it.  The major banks will be bailed out again if necessary.  At this point, I can’t even come up with a principled libertarian solution that will solve the problem without having a complete disaster.  If anyone has any suggestions, please let me know.

There is often this confusion between independence and libertarianism.  I find that even many libertarians have confusion here.  Libertarians tend to be individualistic and that is fine.  But there is a perception among many (again, libertarians included) that being libertarian means isolating yourself from others.

Libertarianism to me is quite the opposite.  I do not want to isolate myself from the rest of the world.  I want to interact with the people around me (although not all of them).  I want the benefits of mutual exchange, whether it is money being exchanged, products or services being exchanged, ideas being exchanged, friendship being exchanged, etc.

Human beings are only able to prosper through mutual cooperation and the division of labor.  Being a libertarian means that I do not advocate the initiation of force for political or social change.  I advocate peaceful interaction between individuals and groups of people.  However, if someone wishes to be left alone and even isolated from society, it is his right to do so, as long as he is not infringing on others.

Out of billions of people on the planet, there are only a few people who would actually be able to survive while completely isolated.  It would mean catching your own food, building your own shelter, and making your own clothes (if you have any).  While a few people could survive, it would be a miserable life, with little in the way of luxuries.

We have a relatively prosperous society today because we benefit from human cooperation.  The division of labor allows for high production and advanced trading.  We don’t have to catch our own food or build our own shelter or make our own clothes.  We can buy these things with money, which we obtain through serving others.  We have so many luxuries that we take for granted and it is because of peaceful exchange and the high division of labor.

While I understand the sentiment of libertarians who say they would like to move to an isolated island or even an island with just other liberty-minded people, I’m not sure why they would consider themselves better off.  Perhaps they would be more free in their own mind, but their standard of living would be far lower, unless they continued to exchange with the rest of the world.

Libertarians are highly dependent on the people around them, just like everyone else.  There is a big difference between dependence on the government and dependence on individuals around you in which you exchange goods, services, ideas, etc.  Everyone is highly dependent on the free market.  Without the free marketplace in which we exchange things, we would all be living at a subsistence level, if living at all.

This is why libertarians should not run away from society.  I understand running away from a tyrannical country or a high-tax state, but you should not seek to isolate yourself from society as a whole.  You should still try to trade and interact with those around you, even if they are not as pro-liberty minded.  You can benefit from them and you may even show them the benefits of peaceful exchange.

The big news in the financial markets earlier today was the FOMC meeting and the Ben Bernanke news conference.  There was no major news.  The Fed is predicting lower growth than originally expected.  The biggest news is the announcement that “Operation Twist” will continue.  I have written about Operation Twist before.

The stock market did not do much on the news.  Neither did much of anything else.  Oil went down and gold went down a little.  Overall, there was not much excitement either way.

The Fed is grasping at straws with this operation twist business.  As I wrote back in February, this policy is not without its consequences.  Lower long-term rates have not done much for the housing market and who knows what will happen to those rates once the Fed stops buying longer-term bonds.

One thing I suspect is that the Fed is buying longer-term bonds so that there will be less rolling over of debt in the near future.  If interest rates and price inflation both go up, then there will be less shorter-term debt to roll over, which means that interest rate payments will not increase as much for the U.S. government.

Of course, as I mentioned, these longer-term bonds would also decline in value if interest rates go up.  This means that the value of the Fed’s holdings would go down.  It would mean that selling these assets does not deflate the money supply as much.  So if there were a scenario where price inflation was soaring, the Fed would have less ability to slow it down.

Aside from these points, operation twist does not mean much.  The Fed ended QE2 almost a year ago and the monetary base has been flat or even slightly down since that time.
http://research.stlouisfed.org/publications/usfd/page3.pdf

The Fed is in waiting mode right now.  It is trying to be Goldilocks.  Not too much inflation and not too much depression.  The problem is that the porridge is going to start being hot and cold at the same time.  It will be freezing on one side of the mouth and sizzling hot on the other.  In other words, we could end up like the 1970’s where we have a recessionary environment with simultaneous price inflation.

When the time comes, I still believe the Fed will choose a depression over hyperinflation.  I’m not sure when that time will come, but the Fed is trying to hold it off for as long as possible.

As freedom seems to erode in America and government gets bigger, there are some positive aspects to look at.  There are two areas in particular where America is still strong in the liberty category.  They are freedom of speech and freedom to bear arms.  While these two areas do have some government interference, particularly in regards to gun control, America is still a relatively free place when considering these two subjects.  I don’t think it is because they happen to be part of the 1st and 2nd Amendments.  I suppose freedom of religion could also be included in the relatively free category.

One area that puzzles me is freedom of association.  For some reason, many, if not most, Americans simply cannot grasp this concept.  It is easy in some circumstances for Americans to grasp, but then very difficult in other areas.

When Rand Paul was running for U.S. Senate, he came under fire from Rachel Maddow and others for suggesting that certain parts of the 1964 Civil Rights Act were harmful.  While Paul did not exactly do a stellar job of defending himself and his position, he was correct in his original assessment.  The problem with the 1964 act is that it was the major start of government interference in freedom of association.  Instead of just saying that state and local governments cannot discriminate based on race (ignoring the federalism argument), the law extended way beyond that and told individuals and companies outside of government that they couldn’t discriminate.

That was really the major start of what has become our highly-litigious society.  It should not surprise anyone that something like the Americans for Disabilities Act would come decades later, which ironically probably hurts disabled people more than it helps them.

After the Maddow/ Paul interview (or debate), some people reversed it and asked the questions in a different way.  For example, some were asking, can a black restaurant owner prohibit a member of the KKK from entering his restaurant?  When the question was posed this way, then all of a sudden many more people understood freedom of association.  The majority of people said that it was his restaurant and his property, so he should have the right to refuse to serve the KKK member.

Many people do not understand libertarianism simply because they cannot differentiate between the law and social behavior.  When libertarians say they want to legalize drugs, some people take that as encouragement for others to use drugs.  When libertarians say that you shouldn’t have to wear a seat belt, some people think that libertarians are against using seat belts.

When libertarians say that business owners, landlords, or anyone else should be free to discriminate, many people take that as libertarians advocating discrimination based on race, gender, sexual orientation, religion, or whatever.  It is not that libertarians advocate racial discrimination.  It is that libertarians believe in freedom and that includes property rights.  If you own a piece of property, you should be able to invite who you want on it and not invite who you want.  This would include a business owner telling potential employees and customers whether or not they are invited on the business owner’s premises.

Of course, in a free market, most businessmen that discriminated purely on racial grounds (or some other grounds) would likely not do well in business.  It is also the right of people to boycott the business.  In addition, if the business owner were not hiring the best employees at the best available prices because of race, gender, etc., then he would only be hurting himself and the productivity of his business.  But if that is his business, he should be free to make that choice, even if it is not tasteful or outright disgusting, as long as he isn’t initiating force against others.

Freedom of association is one topic where Americans really need to evolve.  We live in a politically correct world now and it is affecting our property rights.  There are a lot of unintended consequences when laws are made interfering with freedom of association.  Americans must see things differently on this topic if America is ever going to be close to free again.

The elections in Greece were held over the weekend.  It seemed that everyone was holding their breath, waiting for the outcome of the elections, and in turn the future of Europe.  You can view the election results here.  As you can see, the first place party could not even break 30%.  Not only was there not a clear majority, nobody could even get a third of the votes.

According to this article, nearly 38% abstained from voting.  For such a seemingly important election, that is a rather high number.  This 38% can be translated into NOTA (none of the above).  It was really NOTA that won the election.

The mainstream media and the rest of the establishment seemed fairly pleased with the results.  Their dream of the European Union and a one-world government is not quite dead yet.  They are still holding out hope that Germany will continue to bail out Greece.

While mixed results in an election can mean different things, I don’t think these Greek elections being so mixed (with seven candidates receiving at least 4%) is the same as what you would see in the U.S.  In the U.S., there are actually some proponents for smaller government, even if just on certain issues.  Some people like Obama and the Democrats for being less pro-war and better on civil liberties.  Some people like the Republicans for supposedly being better on lower taxes and less spending.  While these things aren’t reality and there are many who support the parties for opposite reasons, there are at least some sentiments for smaller government.

In Greece, the voters are looking for a year-round Santa Claus.  They believe in a free lunch and they want it.  The problem at this point is that the chickens have come home to roost.  They can no longer live off of past savings and the current productivity is very weak.  It is a massive Keynesian experiment gone bad, even though it was predictable.  A country cannot expect to thrive with a massive welfare state and high taxes.  When there are people who are 50 years old and retired on a big government pension, you know there is something not right.

The Greek voters are really mad at the politicians right now.  They are not sure who to blame the most at this point.  But it is a large majority of Greek voters who are asking for a free lunch.  They are asking for the impossible.  The politicians can keep making promises, but when they fail to deliver anything, then the people get mad.  As Margaret Thatcher said, the problem with socialism is that eventually you run out of other people’s money.  I suppose that can be applied to the Greek welfare mentality.

In the end, this election will mean nothing.  Perhaps the German government will fork out another bailout package one more time.  They are throwing resources down a drain.  Greece is going over a cliff, whether it is this month, next month, or next year.  It is inevitable that Greece will break apart from the euro zone and go back to printing its own money.

There really isn’t that much good news for the American economy.  There is the small wave of believers in the free market, mostly followers of Ron Paul.  There is also technology, particularly in the electronics industry, that continues to grow by leaps and bounds.  Everything related to government though is bad news for the economy.

There is one other item that is a little bit of good news.  It would not be considered good news for Keynesians.  It is good news for Austrian school followers and those who have a good understanding of the free market.  The good news is that debt levels for Americans is stable or even slightly down.

As I said, this is bad news for Keynesians, who believe that prosperity comes from people spending money.  They can never seem to explain why people don’t want to spend money in poor African countries.  If all you need for prosperity is for people to want to buy things, then the whole world should be wealthy.

For those who are not Keynesians and who believe in the workings of the free market, a reduction in personal debt is good news.  An economy grows and prospers from savings and investment.  If you didn’t have savings and investment, it would be very difficult for the average standard of living to increase.

Part of the reduction in personal debt has come about because of people giving up their houses in short sales and foreclosures.  While this is not exactly the ideal way for personal debt reduction, I suppose it still counts in a sense.  But aside from that, credit card debt has actually gone down for the average American since the fall of 2008.  According to this website, outstanding revolving consumer debt went down from $989 billion in the 4th quarter of 2008 to $787 billion in the second quarter of 2011.  I’m not sure what the latest statistics are, but I don’t believe they have changed much.  You can also read some interesting credit card statistics on this website.

The average American, even those who are working, realizes that the economy is not strong.  People have cut back, whether it is not taking a big vacation or simply cutting back on the daily Starbucks.  While people are probably not saving as much as they like, paying down credit card debt is almost the equivalent to saving.  This is actually what the economy needs.

The major problem of course is government, particularly the federal government.  It is offsetting the work and newly found frugality (relatively speaking) of the average American.  While the average American has stopped accumulating debt and is even paying it down a little, the federal government continues to accumulate massive debt and higher spending.

I think Americans are actually smarter with their finances than what many people think.  There is a certain intuition.  While Americans may get sucked into Fed-induced bubbles, like what happened in housing, they have enough sense not to get too bogged down in credit card debt.  Of course, some people are absolutely terrible with their money, but I am just talking about the average or median person.

In conclusion, an economy grows and standards of living increase due to prior savings and investment. Consumer demand only drives an economy in the short run.  You can’t consume what isn’t produced.  The key to wealth and prosperity is production and you can only get increased production through savings.  The average American is helping the economy in the long run by saving more and paying down debt.  The federal government is hurting the economy by spending more and increasing the debt.

Immigration is one of those few issues that libertarians can reasonably disagree.  It is kind of like the issue of abortion in that regard.  There are some good libertarian arguments to be made for both sides of the debate.  In fact, with immigration, there is even middle ground that might be reasonable for a libertarian.

I have never really understood those who are really anti-immigration.  It is really the heart of America.  I’m not sure if these people are racists or just scared of people who might look a little different or speak differently.

Some of the reasons for people being anti-immigration, that may sound somewhat reasonable, are actually reflections of big government that is already in place.  There are two primary examples here.

First, some say we can’t have open immigration because of the threat of terrorists.  Some might even argue against most or all immigration, particularly from specific countries.  Many of the terrorists on 9/11 were actually in the U.S. legally, so the current policy didn’t stop them anyway.  But even if closing the borders were effective (which it wouldn’t be), the only reason there are so many people wanting to cause terror in the U.S. is because of the U.S. government.  If there were no bombings of other countries, and no blockades, and no coups, and no military bases, and no propping up of dictators, then there would be few people who would ever even care about America.  They would certainly have little incentive to hurt Americans.

Second, some say we can’t have open borders or any immigration at all because they will collect welfare.  Again, this is a symptom of big government.  If we didn’t have a welfare state, then we wouldn’t have to worry about immigrants coming to America to collect free goodies.  The only people that would move to the U.S. would be those looking for work (or perhaps vacation).

I have never understood the welfare argument.  Welfare does far more harm than good in the long run for most people.  Yet, if it actually worked, I would probably feel more sorry for the poor Mexican immigrant who had little opportunity who is just looking for work.  Why would I think that some bum in America is more entitled to welfare, just because he happened to be born in a certain area?  I’m not saying that all welfare recipients are bums, but my point should be well taken.

It is hard to believe what has happened to America.  The land of the free is now the land of taxes, wars, and passports.  It used to be that almost anyone could go to America in search of a better life.  You had the responsibility of taking care of yourself and your family, but you were free to search for opportunity.  It came to a point where immigrants would go through New York Harbor, but even then, they were just checked to make sure they weren’t carrying any strange disease.  Aside from that, most could enter almost immediately.

I hope we can one day see an America where Americans are not worried about immigrants because of terrorism or welfare, because there will be little of it.  Maybe we wouldn’t have to worry about drugs either if they are actually legalized.  If America becomes free again, then immigration will become a moot point for most people.  And if other countries follow suit, then maybe there won’t be so many people trying to flee their homeland.

If America stays on its current path, then I don’t think Americans will have to worry about immigration anyway.  Who will want to come here?

North Dakota Residents Like Big Government: at least that is the conclusion that can be drawn from Tuesday’s election.  There was a ballot initiative – Measure 2 – which would have banned all property taxes in the state.  It would have made North Dakota the only state to have no property taxes.

It didn’t surprise me that the measure failed.  What did surprise me is by how much it lost.  Less than one quarter of the people voting actually voted to support the measure.  Over three quarters said no to the measure and yes to big government.  You can see the results here.

According to this article, eliminating the property tax in North Dakota would have meant a cut of 23% from the state and local taxes.  North Dakota has somewhat high property taxes.  It also has state income taxes and a sales tax.  Of course, it has the thousands of other taxes that other states have like gas taxes, car registration fees, etc.

North Dakota has seen a substantial increase in tax collections recently, due to the oil boom in the western part of the state.  It is also one of the most solvent states, with low unemployment.  There was never much of a property boom there during the housing bubble that so many other areas in the U.S. had.  This means that there also wasn’t a big bust there, so the budget stayed balanced with no big cuts being necessary, as tax collections did not dry up for the state government.

This would have been the perfect time to eliminate the property taxes.  With the big boom from the oil discoveries, the residents there could have done away with all property taxes and still not have had to cut much from the budget.

According to this story, the opponents of the measure (the advocates of big government) outspent those who favored abolishing the tax almost $600,000 to $22,000.  It should be no surprise that the National Education Association made a significant contribution against the measure.

I can just imagine the commercials being run and the things being said on television.  They were probably telling people that if the measure passed that firefighters wouldn’t have the funding to show up to houses burning down.  The police wouldn’t be able to respond to 911 calls.  The athletic and arts programs would be shut down in the public schools.  Or worse, the schools would have to shut down.  While I might be exaggerating a little on those comments, they are probably not too far off.

I suppose there is one libertarian argument against the measure and that is that it takes away local control, just as someone was cited in this article.  However, I doubt many people voted against the measure thinking this way.  Also, I would have had no trouble voting for the measure because it wasn’t dictating any kind of replacement tax.  It would really be up to local governments to find other ways to tax if they chose to do so.  Also, this local argument doesn’t fly when it is usually the state governments that mandate government education be provided.

It really is shocking that less than one quarter voted to support this measure.  This is in a supposedly red state.  It just shows that Republicans love big government too.

In Massachusetts, which is thought of as a liberal high-tax state, the two ballot initiatives there to end the state income tax received higher percentages than this North Dakota initiative.  In fact, the first drive to end the state income tax in Massachusetts actually came close to winning.

I would think it would be harder to repeal a state income tax than property taxes.  In most states, half the residents pay little to no state income taxes, so it is hard to make the case for them.  For property taxes, the case should be a little easier.  I know that renters won’t directly benefit immediately, but it should be easy enough to explain that if all landlords have their expenses reduced significantly, it will probably mean lower rents.  While cost does not automatically dictate price, it can and does affect it.

If the vote in North Dakota is at all representative of the country, then I guess most Americans are still not ready to give up their slave status to the state.  This was a perfect opportunity where there was no voting for the lesser of two evils.  It was an up or down vote and North Dakota residents decided overwhelmingly that they like their big government.

The economy, particularly in the U.S., continues to hang in the balance.  Unemployment is still high and the official numbers are not all that accurate because they don’t include part-time workers and people who stopped looking for work.  The stock market has been a bit of a roller coaster ride.  Meanwhile, price inflation has stayed relatively low, while interest rates are at or near all-time lows.

The Federal Reserve is walking on a tight rope.  On one side, there is inflation.  On the other side, there is recession or depression.  The problem is, as time goes on, the rope gets thinner and thinner.

If the Fed leans too far to one side, it might fall over.  Or perhaps it will try to overcompensate going the other way and fall to the other side.  Or maybe the rope will end and a fall into a combination of both pits will occur.

I think the low interest rates and the recently downtrending stock market indicate that another recession is likely.  The problem is that there was not a correction allowed to happen from the last recession.  The problems are much worse now because of all of the debt and money creation.

I think a likely scenario at this point is for another recession to appear.  Then, Helicopter Ben and the Fed will react with more quantitative easing (money creation).  The next round of QE will probably not be as generous in terms of results.  I think we are likely to see higher price inflation, unless the Fed is timid by its own standards, in which case the next recession will be deep.

I see a scenario similar to the 1970’s as more likely than a scenario like the Great Depression.  I am not necessarily talking about severity, but the characteristics.  I think it is likely that we will eventually hit a point of seeing high price inflation and a weak economy at the same time.

If things became anywhere near the Great Depression, then the Fed would open up the flood gates of money and would trigger severe price inflation.  Bernanke has been critical of the Fed during the period of the Great Depression for not being aggressive enough.

Another thing to consider is that there was no FDIC during the Great Depression (at least in the beginning of it).  There were a lot of bank failures, which reversed the fractional reserve lending process.  This was essentially a deflation of the money supply.  So even though the Fed actually did try to create some monetary inflation, it was not enough to offset the bank failures and the average person’s desire to spend less.

Hopefully, if we do see a scenario like the 70’s, the Fed will act in much the same way.  Paul Volcker, as Fed chairman, slammed on the monetary creation brakes.  The U.S. had a good hard recession, but it also set the stage for a nice recovery.  That was probably the last time in American history that a recession was allowed to play out and a great deal of the malinvestment was able to be corrected and reallocated more in accordance with the free market.

It is still possible that we could have a Japan-like scenario where we see low price inflation and an economy that just kind of sputters along.  However, I don’t see it happening for a couple of decades like it has happened in Japan.  The U.S. central bank is more aggressive than the Bank of Japan and Americans are unlikely to buy U.S. government debt to the same extent that the Japanese have bought Japanese government debt.

Let’s just hope that if we hit a 1970’s America scenario that the Fed will act in much the same way now as it did then.  While it would cause a severe recession, it is better than the alternative of hyperinflation.

There was news over the weekend that the euro zone has agreed to lend Spain up to 100 billion euros.  That is about 125 billion U.S. dollars.  Spain has been the latest country to follow Greece in its solvency troubles.

While this may help “save” Spain in the short run, it is just more kicking of the can down the road.  The problem is, whenever they kick the can further down the road, it makes the final day of reckoning that much worse.

While comparing a government to an individual or family is not a very good comparison in most cases (because governments rely on their monopoly of the use of force in a given territory), it can actually provide a pretty good analogy in this case.

Let’s say that someone makes $50,000 per year in income.  For the sake of this discussion, let’s pretend there are no taxes.  Let’s say that this person spends $60,000 per year.  He is running a deficit each year of about $10,000.  In addition, his total accumulated debt is $100,000 (and growing by $10,000 per year).  Let’s say this debt is in the form of credit card debt.

What is the solution for this person?  He could declare bankruptcy, which would wipe out the $100,000 in credit card debt.  However, his credit card companies would shut down his accounts and would no longer be willing to lend him money, especially without collateral.  So the person would be forced to cut his spending by at least $10,000 per year, assuming he can’t earn more.

Another solution is to cut spending drastically.  Not only does the person need to stop running up more debt, but it would probably be a good idea to start paying down the credit card debt, as the interest payments alone are high.  This would mean the person would have to cut spending each year by a far greater amount than the $10,000.

Another option is for the person to get another loan.  He could get a loan (from a fool) for another $20,000 and this would allow him to continue his spending for the next 2 years.  The problem is that the total debt goes up to $120,000, or more if you include interest on the debt.  By getting another loan, this person is just that much further in the hole.  It means it will be that much more difficult to get out of this situation in the future or else the bankruptcy will be that much bigger.

By Spain getting a loan from the euro zone, it just means they will be that much further in the hole.  The Spanish government will never be able to get out of the hole unless there is a big direct bailout (not a loan) or else bankruptcy.

It makes it easy to see how all of this will end.  By giving Spain a loan, it just encourages a continuance of reckless spending.  It means that things will be that much worse in the near future.

The only solution is a dramatic cut in government spending.  It will come eventually, either way.  The government can try to raise taxes, but this will not do anything.  Art Laffer had it right with his curve.  If you raise taxes high enough, it just discourages further production and can actually lead to a decrease in total tax collections for the government.

It started with Greece.  Now it is Spain.  This will be a pattern throughout the world.  It will happen in many western European countries.  It will probably happen in China, Japan, and the U.S., among others.  At some point, governments will be forced to cut back on spending.  The longer they wait, the more painful it will be in the future.