He is, of course, correct --- except in terms of tense. They are not on the brink, they're there. People keep fooling themselves that this is a liquidity crisis; its not, its an insolvency crisis. Our debts are unsupportable based on our incomes.
Its worth reading his full article, but here's the key excerpt:
the necessary condition for resolving the debt crisis is a reduction in the outstanding volume of debt, an increase in nominal GDP, or some combination of the two, to reduce the debt-to-GDP ratio to a more sustainable level.
From this perspective, it is clear many of the existing policies being pursued in the United States and the United Kingdom will not resolve the crisis because they do not lower the debt ratio.
In particular, having governments buy distressed assets from the banks, or provide loan guarantees, is not an effective solution. It does not reduce the volume of debt, or force recognition of losses. It merely re-denominates private sector obligations to be met by households and firms as public ones to be met by the taxpayer.
This type of debt swap would make sense if the problem was liquidity rather than solvency. But in current circumstances, taxpayers are being asked to shoulder some or all of the cost of defaults, rather than provide a temporarily liquidity bridge.
In some ways, government is better placed to absorb losses than individual banks and investors, because it can spread them across a larger base of taxpayers. But in the current crisis, the volume of debts that potentially need to be refinanced is so large it will stretch even the tax and debt-raising resources of the state, and risks crowding out other spending.
Trying to cut debt by reducing consumption and investment, lowering wages, boosting saving and paying down debt out of current income is unlikely to be effective either. The resulting retrenchment would lead to sharp falls in both real output and the price level, depressing nominal GDP. Government retrenchment simply intensified the depression during the early 1930s. Private sector retrenchment and wage cuts will do the same in the 2000s.
New debt (government or otherwise) is no cure for excessive old debt. As a society, we westerners have borrowed too much from our future, for the last decade or two buying stuff we don’t need with money we don’t have. Time to pay the piper. Which means aggregate demand (AD) way below aggregate supply (AS); which means falling prices as companies try to clear inventory, and more layoffs and falling incomes as companies cut capacity; which leads to even lower AD, so AS has to keep getting slashed => vicious circle!
The public sector is trying to pick up slack for the private sector fall-off, but (a) it will fall short of what’s necessary (as argued by Krugman, etc.), as the private sector retrenchment is simply too big to counteract, (b) fiscal deficits are simply an intergenerational wealth transfer to current from future taxpayers who will ultimately have to pay it back, at a time when demographics works against that dynamic of kicking the can down the road, and (c) therefore, the more government tries to fill that gaping AD-AS gap, the sooner the ultimate day of reckoning when global imbalances unwind in a most disorderly manner, as foreigners stop throwing good money after bad and refuse to finance U.S. deficits. So U.S. interest rates will ultimately skyrocket as everyone finally acknowledges that the U.S. simply does not have the productive capacity to allow it to pay off its debt, requiring it to either default, or repay its bills with tremendously devalued dollars.
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