Nominal growth - the annualized change in the amount of goods and services sold multiplied by prices - drives sales for companies and drives government revenue (i.e., taxes), which allows governments to service their debt. Government bond yields are the cost of funding that debt. As long as nominal growth is higher than the cost of funding debt, even heavily indebted countries can buy the time to restructure their economies. This has been the US story since the Lehman Bros crisis.

For Spain, Italy, Portugal, Greece, and Ireland, borrowing costs that are higher than nominal economic growth have created a vicious circle of economic depression, rising deficits, chronically high unemployment, and rising government interest rates as investors conclude that some form of default is inevitable. France and perhaps even Germany are now coming close to falling into the same dilemma. In our view, a total commitment to achieving nominal GDP growth, even at the risk of future inflation, can prevent the economic crisis in Europe from getting worse. Germany is trying to decide if it is willing to adopt that approach.

David Fuller's view Interesting, and relevant to the email above, including my response.

I think subscribers will also be interested in The Weekly View's comments on emerging markets.