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I don't think budget deficits equivalent to 12%+ of GDP are sustainable except in an emergency and for a relatively short period.  Not only do you have the increased servicing cost, but the interest rates demanded by sovereign debt markets become unsustainable - as in the case of Greece.

Frank this is objectively true in our case in the Eurogroup. But for a state with its own currency such deficits can be run for "long" periods without defaulting. First of all you have to continuously depreciate your currency so that rolling over debt doesn't kill you. Secondly, you set up some sweet rates on government bonds to seduce local investors, keep the debt in borders. Watch the US closely for something along these lines.

There's an obviously problem, at some point the folk may become nervous about an ever depreciating currency. After that it's game over.

You might find me At The Edge Of Time.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Mon Apr 12th, 2010 at 04:20:57 PM EST
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