The third ingredient in this intoxicating debt brew has been the extraordinary rise in private-sector borrowing since the 1980s. This growth was made possible by the interaction of a number of widely held beliefs. The first was the notion that everyone should have access to credit, partly in the interests of social justice and partly in the interests of general economic prosperity. Such credit could be made available because of the belief that, properly structured, the debts of traditionally uncreditworthy borrowers were as sound as anyone else's. This idea was part of a broader conviction that advances in financial technique were increasing the amount of debt that the economy could sustain with safety. A new generation of mathematically trained bankers -- quants -- was dreaming up instruments such as structured credit vehicles and complex derivatives that contained and dispersed risk. And a new generation of wise central bankers had learned the lessons of the deflationary 1930s and the inflationary 1970s and were now able to guide the economy into the "great moderation" of low and stable inflation and interest rates.
By the early 2000s, it seemed that the solution for almost every problem in the Western world, personal as well as macroeconomic, was to borrow. Not anymore. The message received from both markets and voters Europe and in America is that the era of ever-higher debt is over.
Indeed, one of the most striking aspects of the eurozone crisis is that bond markets have not discriminated between causes of excessive debt. Greece was denied credit and had to go begging to Brussels for a bailout, not because it had taken part in the real estate bubble but because it had abused entry to the eurozone to enjoy a public borrowing spree. Ireland was denied credit because, even though its public finances were in solid shape, it had allowed its banks to overwhelm them. Italy is perhaps the most remarkable case of all. It is now threatened with loss of credit, not because of any post-euro borrowing, nor because of its current budget deficit (which is not much higher than Germany's). Rather, it is being punished for sins committed in the 1980s and early 1990s when it built up its public debt to levels that the markets have suddenly decided are unsustainable. What we are seeing, in other words, is a wholesale revision of the rules about debt that have held true for decades.
The markets have highlighted a fundamental shortcoming in Keynes's ideas: He assumed that governments would always be able to borrow. If they cannot, then Keynesian economics is dead in the water. In the European periphery, the markets have preempted the austerity debate by refusing to lend. But even where markets have not forced the issue, voters have been taking matters into their own hands. Germany may have enacted stimulus measures in 2008, but it followed that by adopting a stringent deficit reduction program in 2009, including a balanced budget amendment to the constitution. Britain's Conservatives, who had been wandering in the political wilderness for more than a decade, seemed out of the mainstream when they proposed cutting the deficit in 2009. The following year, the party was voted into power amid a debate that changed the political climate so dramatically that all parties were soon proposing relatively similar austerity programs. The United States, the last holdout of fulsome deficit spending under President Barack Obama, lurched sharply rightward in the 2010 congressional election. Now, as in Britain, what originally seemed like a minority opinion in favor of fiscal austerity has become accepted policy, with congressional Republicans bent on slashing the budget at any cost and the White House's Keynesian voices now drowned out by the administration's chorus of deficit hawks.
It is not clear that the bond markets or voters who have called an end to Keynesianism have a clear vision of what lies ahead. The former know only that they are no longer willing to lend, the latter that they are no longer willing to borrow. The great debt experiment has left the Western world with a problem that has no easy solution. The outcome is hard to predict, but in the end it is likely to involve the reduction of both private and public debts to levels that the markets consider sustainable -- whether by debt write-offs or through inflation. One thing seems clear: For the first time in decades, borrowing will not form part of the solution.