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Think this economy is bad? Wait for 2012.

Even when a government tries to do the right thing, electoral politics make it difficult. During the 1997 Asian financial crisis, South Korea negotiated a $55 billion loan from the International Monetary Fund, the World Bank and others to avoid defaulting on its private bank loans; in return, it promised reforms such as closing weak banks. But confidence evaporated and the currency plunged when the leading opposition candidate in that year's presidential election attacked the agreement.

A similar situation occurred in the election to succeed Brazil's President Fernando Henrique Cardoso, who had brought stability to his country during the 1990s after decades of inflation and default. When it became apparent that his handpicked successor would lose in 2002 to leftist challenger Luiz InĂ¡cio Lula da Silva, Brazil's stock markets and currency plunged, and the government lost the ability to issue long-term bonds. Inflation and interest rates shot up, hammering the economy.

These countries actually offer an uplifting lesson: The damage wrought by the crises helped build support for solutions. In Korea in 1997 and Brazil in 2002, populist challengers ultimately embraced their predecessors' reform plans. Greece's socialists campaigned last year promising to raise public salaries, invest in infrastructure and help small businesses. But they are now undertaking painful reforms, such as raising retirement ages and injecting more competition into protected industries such as trucking.

Of course, these countries are relatively young democracies with legacies of economic mismanagement. It couldn't happen here anymore, right? Think again. Yes, this year the United States passed the sweeping Dodd-Frank Act, seeking to make financial crises a thing of the past. But there are countless problems that can develop into disasters (think Foreclosure-Gate). And Dodd-Frank is useless if the next crisis involves our tattered government finances.

Which brings us to 2012.

Let me take a stab at what the next crisis will be. Our deficit, as a share of GDP, is at a peacetime record, and the debt is climbing toward a post-World War II record. Thoughtful economists agree on the response: Combine stimulus for our fragile economy now with a plan to slash the deficit and stabilize the debt when the recovery is more entrenched.

Yet the approaching November midterms have made it impossible to advance a serious proposal for doing that. Congress has been unable to pass a budget, and the government is operating on a short-term "continuing resolution." President Obama's plan for reining in the national debt consists of appointing a bipartisan commission that won't report until after the midterms. Even if the commission can agree on a realistic plan to chop the deficit, the polarized state of Congress suggests slim odds of adoption.

With neither party able to muster the support to get serious about reducing the deficit, both may prefer to kick the problem down the road to after 2012, in hopes that the election hands one of them a clear mandate.

For now, there's enough risk of Japanese-style stagnation and deflation that U.S. interest rates could remain very low for a while yet. But if that risk fades, investors in U.S. Treasury bonds will want to know how we'll get our deficits and debt under control -- and could demand higher interest rates to compensate for the uncertainty. By then, though, the 2012 campaign may be upon us. The Republican nominee will assail Obama's fiscal record and promise a determined assault on the debt. Obama will respond by blaming George W. Bush and promising to unveil his own plan once he's reelected. Neither will commit political suicide by specifying which taxes they'll raise or which entitlements they'll cut.

Will investors trust them, or will they start to worry that the endgame is either inflation or default, two tried-and-true ways other countries have escaped their debts? If it's the latter, we'll face a vicious circle of rising interest rates and budget deficits, squeezing the economy and potentially forcing abrupt and painful austerity measures.

And if, instead, the markets continue to give us the benefit of the doubt, relieving our politicians of the need to act: Circle 2016 on your calendar.

Greg Ip is U.S. economics editor of the Economist and the author of "The Little Book of Economics: How the Economy Works in the Real World."

Greg Ip

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