Crisis averted, we must hope, at least for a few months; Republicans and Democrats have figured out after a decade of expansive government that there are limits to how much debt they can amass and how much in taxes people can pay to cover the deficits.
1575 will be poo pooed as too far in the past to be a lesson today because things are much different now and parents just don’t understand – unless it’s actually just about the same.
In 1575 Spain was in pole position as the world superpower. But even in a monarchy a chain of events can start small and wreck an empire and by 1573, military costs were consuming 50% of Gross Domestic Product. Boston University economics professor Christophe Chamley at Bloomberg puts it in perspective:
Each of the 18 main cities of Castile levied a special tax earmarked for long-term debt service. The level of this tax was set every six years through negotiation with the king. Tax collections were used first to pay off local long-term bondholders, with the rest sent to the central government. The local long-term bondholders were, in large part, the elderly living in the area. So local taxpayers realized that if they didn’t pay, their parents would be hurt. Thus, this precursor to Social Security had an effective enforcement mechanism — the ire of the elders.
But when the cities did not want to pay even more, King Philip II stopped paying interest on the short term loans, which were all foreigners anyway. But those bankers were leveraged themselves and a banking collapse ensued.
The crisis was eventually resolved, money started flowing again, but Spain had already begun its slow decline – commerce and prestige had found other venues.