When Adam Smith wrote his landmark book, "An Inquiry Into the Nature and Causes of the Wealth of Nations", he dedicated long parts of it to the problems nations get into with debts and with debauching their currencies to get out. It was true in the 1700s and it's equally true now.

The near downgrade of UK's debt from AAA, the real downgrade of Ireland's debt and the possibility of more to come highlights the difference in how nations are approaching economic problems. The U.S. and same-minded nations are spending like drunken sailors hoping that consumers will do the same. We're also taking our show on the road to try and convince more nations that stimulus spending is the answer to our woes.

It's a hard sell in Europe, however, because Germany is taking a more conservative approach. This could be stubbornness on the part of the Germans, refusing to jump on the global stimulus bandwagon that will roll us right out of recession. But, then again, it could be that Germany has a better grasp of history.

Germany knows that government spending has to be paid for. When the German government was required to pay reparations after World War I, they stepped up their printing of currency to make the payments and unleashed devastating hyperinflation. The end result was the Nazi party coming to power, so it makes sense that Germany is hesitant.

Nothing's Free
The fact is that all this spending will be paid for through tax increases or a method the U.S. is already using - having the Fed buy up its own Treasury's bonds, a clever twist on simply printing more money to inflate the currency. We're all hoping that the government will know exactly when to pull the plug on financial restructuring, but the track record of Keynesian monetary policy has not been pretty. (See Giants of Finance: John Maynard Keynes and Can Keynesian Economics Reduce Boom-Bust Cycles?)

Consumers themselves are reigning in spending and trying to ride out hard times. This is a commonsense approach to crisis – reduce debts, bulk up emergency funds and wait for a bottom before buying back in to the market. If you were to go out, load up all your credit cards and exhaust every credit option, you'd find it next to impossible to secure another loan. Unlike a nation, you can't crank up your printer and scan $100 bills – well, you could, but someone would eventually notice and then debt wouldn't be your biggest problem.

Keeping Spending Under Control
Nations are debtors just like normal people and if they spend out of control and raise their chances of default (or inflation), they have to expect the price of lending to go up to reflect their rising risk. The fact that AAA ratings are being challenged should reassure us because at least someone is trying to inject some commonsense into the overenthusiastic application of stimulus spending. The ratings agencies and the impact of downgrades do the same job as the threat of arrest that keeps people from printing money in their basements. (For related reading, see Stagflation, 1970s Style.)

Related Articles
  1. Insurance

    Medicare 101: Do You Need All 4 Parts?

    Medicare is the United States’ health insurance program for those over age 65. Medicare has four parts, but you might not need them all.
  2. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  3. Professionals

    Credit Risk Analyst: Job Description and Average Salary

    Learn what credit risk analysts do every day and how much money they make on average, and identify the skills and education needed for this career.
  4. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  5. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  6. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  7. Economics

    Understanding Donald Trump's Stance on China

    Find out why China bothers Donald Trump so much, and why the 2016 Republican presidential candidate argues for a return to protectionist trade policies.
  8. Economics

    Will Putin Ever Leave Office?

    Find out when, or if, Russian President Vladimir Putin will ever relinquish control over the Russian government, and whether it matters.
  9. Forex Education

    Explaining Uncovered Interest Rate Parity

    Uncovered interest rate parity is when the difference in interest rates between two nations is equal to the expected change in exchange rates.
  10. Fundamental Analysis

    Using Decision Trees In Finance

    A decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. How much money does Florida make from unclaimed property each year?

    Each year, goods such as money, financial investments and physical property are either auctioned off or appraised before ... Read Full Answer >>
  3. How much money does New York make from unclaimed property each year?

    According to the Office of the New York State Comptroller, types of unclaimed property accounts include bank accounts, wages, ... Read Full Answer >>
  4. Are mutual funds considered cash equivalents?

    Though all mutual funds are considered liquid assets, only certain funds are considered cash equivalents. What Is a Cash ... Read Full Answer >>
  5. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>
  6. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center