if act I of the recent economic turmoil was the banking crisis and Act II the recession, then the final act will be the crisis from exploding government deficits. By 2014, says the IMF, total public debt in the advanced economies will balloon to an unprecedented 115 percent of their GDP, compared with 75 percent in 2008 (60 percent is generally considered sustainable). Two IMF directors warned last month that in order to get debt back down to more controllable levels, governments will have to move from an average 3.5 percent deficit in 2010 to a 4.5 percent budget surplus by 2020--and hold it there for 10 years, mostly by freezing spending and cutting entitlements. The planet where such budget-cutting discipline exists has yet to be discovered.
What will the world look like when its largest, most advanced economies have to simultaneously finance huge deficits? Scenarios go from runaway inflation to a global version of slow-growth Japan. No advanced country has defaulted on its government debt since the 1930s, but even that could change. IMF economists note that one reason Western economies survived high debt levels in the past was that investors had few options to move money out of home markets. Now emerging markets can increasingly absorb large amounts of capital, and the day when China, India, and Brazil can shelter investors is on the horizon. That could make debt crises and defaults in rich nations more likely--an ironic turn of globalization.