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Will government budget deficits generate a worldwide fiscal crisis?

From a Real-World Economics Review blog

Many pundits and policymakers have been calling for drastic reductions in government budget deficits throughout the world. Their fear is that the weight of accumulating government debt will lead to disaster under the presumption that it will drive up interest rates, cause inflation, and force defaults.

What may appear to be reasonable policy today, they caution, will bring catastrophe in the not too-distant future. The groundswell of fear is so great that calls for budget balancing have spilled into grass-roots internet campaigns and political movements to adopt balanced- budget requirements for national governments.

These are not the only voices, however. Just as vehement are those arguing that the real danger lies not in increasing, but reducing the budget deficits of monetarily sovereign governments.

They say that sovereign government spending is, by definition, private sector earning and that warnings regarding national bankruptcies are based on a flawed understanding of modern fiscal budgeting and financial markets. They point to the unemployment and stagnation created by austerity programs as evidence of what reducing spending and raising taxes really accomplishes.

Source: Real-World Economics Review

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