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But the Euro at a four year -- Greece Spain and Portugal each and each fiscal crisis that could have a domino effect.
When it comes to the European debt debacle what is fact and what is fiction what does that all mean for us here in the US.
Joining us now are Vincent Reinhart resident scholar with the American Enterprise Institute a former director at the -- there and his wife Carmen Reinhart director of the University of Maryland center for international economics and call -- our.
-- this time is different eight centuries of financial folly great to see both of you together.
Carmen is what are the biggest myths that -- debacle can't happen here in the US.
And all the troubles in Europe somehow postponing our day of reckoning.
Because it makes it's cheap and easy for us to borrow in the short run.
Well that's right I think it.
Only a year ago we had said.
The some of the wealthiest economies in the world would be.
Candidates for default.
Who would have believed this who would have believed those in 2006.
If we have said we couldn't -- of eighty almost depression style.
Financial crisis here in the states so it could happen to anyone I think that's the lesson that.
We should be taking from this.
This -- European crisis and America's own debt situation are similar and how they are different.
So there to wake -- calls from Europe.
The first one is investors actually only buy securities if they think they'll get paid back room.
So that a country that has a very high deficit in the high debt load.
And no real reasonable track to get back to a sustainable path does run into funding problems.
Obviously with Greece may be a couple other countries down the road.
The US is.
Going down that same path and so that's the first lesson.
The second lesson investors learned over the last month -- so is the Euro is actually not a plausible reserve currency.
Reserve managers the people -- you know build up foreign exchange reserves in China in Korea.
All all all -- the Asian Pacific rim in the mideast they buy.
In a currency.
And Euro denominated some government securities or risky because you don't -- you what you buy Greek debt you buy German that you buy Italian debt.
And that not all the same.
US treasuries on the other hand -- big liquid market what that means to us is.
There's going to be a backstop demand for US treasury securities for awhile to come because those reserve managers are pretty much stuck with -- -- And that means politicians.
Won't get a wake -- call any time soon.
Because they're not going to see upward pressure on interest rates.
Carmen another myth might be that the austerity the fiscal austerity you're seeing in Europe that's -- know.
It's short term solution for these problems are we going to see long run really really lackluster growth.
There are the median.
Was there we go the route.
Or whether importantly we see these countries go the route of fiscal austerity.
Debt restructuring or a combination of both.
The low growth.
And pretty dismal.
Economic performance has been the norm during those episodes of debt crises.
Further down the road.
Dead over hands.
High levels of debt debt in excess of 90%.
Is -- benchmark not the only benchmark.
But high levels of debt have been historically associated.
With weaker growth performance and I think it's important to note.
Both the government and the private sector are highly -- right now.
Well -- first off on -- notified about the dinner table who wins I've -- but secondly how -- -- got Paul Volcker and a first on Fox Business interview tonight with his -- in on California.
What would you do if you're running the Federal Reserve or the president's ear right now because the answer to everything seems to be.
Let's spend more money that can't always be the right answer.
Sometimes there's just deadly silent.
That's the really bad times and from what I guess right now the important thing is to show that there actually are grownups of Washington DC.
That it is possible would get the fiscal accounts on a sustainable track -- -- Move sharply right now the economy is still weak the unemployment for greatest.
This close to 10% but what we really need is a credible commitment to.
Reduce spending and a more efficient tax system so that.
Investors in US government securities.
Don't for a minute worried at any point about getting repaid.
-- feel I don't agree or disagree -- -- hot I I would add that it if anything.
That I have learned from looking at all these crises is often not the debts that you see but the debt that you don't see.
That get you.
There are drew huge.
Possibilities of off balance sheet items.
In both the private side and in the public side in the public side because of guarantees.
Government guarantees whether -- explicit or implicit.
And on the private side because of all Balanchine items are debt situation is actually a lot worse.
Our best estimates.
Based on official statistics.
Indicate and so I think the wrong lesson.
To take out of this is a lesson of complacency.
That we really don't have to do a lot right now.
Com and investors bring forward a crisis state they look like -- they look to see if it's a plausible path and if it's not that on -- Called -- trotting it -- bottle or didn't happen this time but next have a problem.
They've been -- car Reinhardt didn't see about that you'd think.
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