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.

Downgrades
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. Credit & Loans

    A FICO-free Loan? See SoFi's Super Bowl Ad

    Non-bank lender SoFi will air its first TV ad during Super Bowl 50. Here's how it's challenging big banks by providing an alternative approach to loans.
  2. Economics

    The 2007-08 Financial Crisis In Review

    Subprime lenders began filing for bankruptcy in 2007 -- more than 25 during February and March, alone.
  3. Fundamental Analysis

    The Evolution of Obamacare Since Its Inception

    Find out whether the Patient Protection and Affordable Care Act, also known as Obamacare, has lived up to its lofty projections from 2010.
  4. Economics

    Economist Guide: 3 Lessons Adam Smith Teaches Us

    Learn three critical lessons about economics from 18th century philosopher Adam Smith, considered by many to be the father of economics.
  5. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  6. Stock Analysis

    The Biggest Risks of Investing in Lockheed Martin Stock (LMT)

    Learn about defense contractor, Lockheed Martin, its leadership within its industry, and how the company can stay on top as the defense landscape changes.
  7. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  8. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  9. Economics

    Lehman Brothers: The Largest Bankruptcy Filing Ever

    Lehman Brothers survived several crises, but the collapse of the U.S. housing market brought the company to its knees.
  10. Stock Analysis

    China Mobile: Just How Big is It? (CHL, CHU, CHA)

    The story behind China Mobile, the biggest company you might never have heard of.
RELATED FAQS
  1. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  2. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
  3. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  4. How many free credit reports can you get per year?

    Individuals with valid Social Security numbers are permitted to receive up to three credit reports every 12 months rather ... Read Full Answer >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center