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Niall Ferguson on the Greek debt crisis.

5:54 PM, Feb 11, 2010 • By MATTHEW CONTINETTI
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Niall Ferguson:

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect

For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

The Economist's Buttonwood columnist has more: "Greek yields have come off their peak and every reduction eases the "debt trap" (interest rate higher than the growth rate) in which the country is stuck. The next Greek financing is not till April. But one suspects the markets will want to test the EU's resolve."Yogurt and rich shipping magnates are no longer Greece's most famous exports. That title now belongs to sovereign debt crises.

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