A Greek, an Italian and a Spaniard spend the evening drinking in a London pub. Who pays the tab? Answer: the American. This satire adds a bit of humor to a disturbing trend whereby the U.S. taxpayer bails out not only "too big to fail" U.S. businesses but then bankrolls overspending European economies via the U.S. Federal Reserve (Fed).
Gerald O’Driscoll, a former vice president and economic advisor at the Dallas Fed, and a current senior fellow at the Cato Institute recently argued that the Fed’s temporary U.S. dollar liquidity swap arrangement with the European Central Bank (ECB) is “essentially a transfer of U.S. dollars to banks in Europe.”
Unlike the Fed, Euro-zone national banks cannot mask or reduce debt problems by simply printing more currency. Only the Fed’s counterpart, the European Central Bank, (ECB) can flood the market with more Euros to ease the debt burdens of the 17 nations. But the ECB’s only mandate is to maintain price stability thereby precluding massive currency infusions. Instead, each of the 17 nations, much like U.S. states, can only shrink debt burdens by cutting spending, defaulting on sovereign debt, or raising taxes.
Thus, the United States, with assistance from the Fed, is not on the path of Greece but California and Illinois are. The U.S. debt burden can and will be diminished by the Fed flooding the market with dollar purchases of U.S. Treasury bonds. This action, of course, adds to inflationary pressures in the U.S. along with pushing interest rates higher.
However with the current U.S. debt at $15 trillion even this Fed action must be accompanied by higher federal taxes, federal reduced spending, or both. The day of U.S. debt reckoning is likely to come sooner rather than later, just as it has for the Eurozone.