The fundamental economic reality implied by fiscal imbalances is that the “rich” economies are not as rich as they would like to believe; they are planning far more expenditure than they can afford. Recognizing this fact sooner rather than later does not eliminate the problem, but it allows for more balanced, rational, and ultimately less costly adjustments. And if attention to fiscal imbalance helps cut ill-advised expenditure, economies can have their cake and eat it too.
I think that this way of putting it is vulnerable to the comeback that we can always cancel our debt, since we owe it to ourselves. I prefer to characterize the problem as one of creating political friction because of the need to disappoint people’s expectations. See my classic (in my opinion) Lenders and Spenders essay.
Miron writes: “Governments, like individuals and businesses, can borrow and therefore spend more than their revenues in any given period. But, like individuals and businesses, governments cannot do so indefinitely.” This is simply false: so long as a government’s revenues are growing, it can consistently spend more than its revenues. It simply needs to see to it that its debt does not consistently grow at a faster rate than its revenues are growing.
Much better would be “The fundamental economic reality implied by current account imbalances is that the “rich” economies are not as rich as they would like; and they know this.”