While the U.S. economy is recovering somewhat, Greece and other countries in Europe are slamming into the limits of debt. The problems we had with overleveraged homeowners and banks hit countries like Spain and Ireland as well. Now the markets are balking over whether some European governments will pay their debts.
Could the same happen here?
Not a chance, said Christina Romer, President Obama's chief economic adviser.
"The United States is the most creditworthy country in the world," she told reporters at a breakfast meeting last week. "We are a country that stands behind our debt."
Markets are unpredictable, however. Moody's Investors Services warned this month that the AAA rating of the U.S. government could come under pressure unless the budget deficit is reined in or the economy grows faster than expected.
"We never know when the wolf will be down at our door," University of Maryland economics professor Carmen Reinhart told a congressional panel. "The wolf is very fickle. And high debt levels make us very vulnerable."
Greece has about $27 billion in bonds due for repayment in April and May. Recession has weakened an already poor government balance sheet, raising the deficit to 12 percent of economic output.
Global credit-rating agencies downgraded Greece at the end of last year. Markets have seen large bets against Greece's prospects for repayment, which in turn weakened the value of the common European currency, the euro.
To counter this sentiment and protect the euro, France, Germany and Greece's other neighbors promised help. The Greek government has introduced austerity measures that will slash the deficit to 3 percent of gross domestic product by the end of 2012. Government wages are tumbling. Raising the retirement age and weakening Social Security payments seem inevitable.
Greece has a $338 billion economy. The Greek government owes roughly $350 billion, or 108 percent of gross domestic product.
The size of the U.S. economy at the end of last year was about $14.25 trillion. The budget deficit last year was $1.4 trillion, or nearly 10 percent of GDP.
U.S government indebtedness varies by how you define it — $7.84 trillion owed to the general public, at home and abroad; $12.35 trillion owed when federal obligations to trust funds for Social Security and Medicare are included; almost $14 trillion owed if state and municipal debts are included.
Reinhart and Harvard University professor Kenneth Rogoff wrote a book last year called "This Time Is Different: Eight Centuries of Financial Folly." The book's title is sarcastic. Each time an economy soaks itself in debt, various authorities argue that the circumstances are different enough that the country can break free of history. Reinhart and Rogoff show this is just not so.
Markets have been speculating about the prospect of default on Greece's debt. Despite the warning from Moody's, a U.S. government default on debts isn't at issue.
But Reinhart and Rogoff found that in a developed economy, once public debt reaches 90 percent of economic output, it starts strangling a country's economic growth.
"The sooner our political leadership reconciles itself to accepting adjustment, the lower the risks of truly paralyzing debt problems down the road," Reinhart said.