How to make sense of the European sovereign debt crisis?

Friday, 9 December, 2011

US political blogger Kevin Drum attempts to ascertain the causes of the European sovereign debt crisis, which has the potential to drag the world into another recession.

Capital inflows produce a capital account surplus, and the flip side of a capital account surplus is a current account deficit. This is an accounting identity, not a matter of morality or recklessness. And current account deficits always produce either matching government debt (i.e., budget deficits) or matching private debt (i.e., low private savings). This is also an accounting identity, not a matter of morality or recklessness.

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