The Heritage Foundation says the multi-trillion-dollar increase in publicly traded federal debt in the US is contributing to a global “debt bubble:”

This debt explosion is likely to raise interest rates significantly for government debt, thereby increasing interest costs for future generations. More troubling at the moment, this policy will increase interest rates for all private debt such as home mortgages, consumer loans, and business loans. The near-term consequences of this debt bubble will be a deeper recession, a longer recession, and a weaker eventual recovery.

This will be compounded by the rest of the world following our lead, as the Obama Administration advocates.

The U.S. will press world leaders to boost emergency government spending to lift the global economy, risking a rift with European nations more concerned with revamping financial regulation.

But, as The Wall Street Journal points out, national governments aren’t the only players:

[State and local governments] should use the remaining $229 billion they’re getting in stimulus money to put their fiscal houses in order. If they don’t, they risk burdening their constituents with devastating taxes in the near future.

Local and state governments face such peril in part because the federal government is about to saturate the market for U.S.-based debt — including debt issued by municipalities — as it props up failed financial institutions and distributes stimulus money. The federal government could overwhelm the credit markets. In the third quarter of 2008 alone, the amount of federal-government debt surged by 39%. This was “the largest quarterly growth rate recorded,” the Federal Reserve recently reported.

So what are states and local governments doing? Some are cutting corporate taxes, some are creating local versions of the New Deal, and others are putting together stimulus packages of their own while waiting for their serving of Federal pork.

But leaders of many struggling cities and states say they can’t afford to wait for their slice of that pie. They face substantial financial hurdles to acting on their own: Their tax revenues are declining, forcing some to slash budgets. They’re constrained by balanced-budget requirements — unlike the federal government, they can’t run up deficits or print money. Still, they’re floating bonds, raiding reserves and shuffling money among various accounts to free up capital for local stimulus efforts.

In Lancaster, Calif., for instance, where the unemployment rate has hit 15.2%, the City Council voted to take $500,000 from a reserve fund to try to spark consumer spending. Anyone who spends $300 at local businesses will get a $30 gift card from the city.

Smart use of surpluses for the rainy day that is upon state and local governments, or following a path that leads over a financial cliff?  We’ll have to see, but I don’t think it will end well for local taxpayers.

Via The Foundry

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