Image: Anthony Mirhaydari

Anthony Mirhaydari

As the kids were gearing up for Halloween just a few weeks ago, everything seemed right in the financial world -- or at least, back on the right track.

Europe had hammered out an against-the-odds agreement to save Greece and bolster its bailout fund. The U.S. economy was revving up again with a solid third-quarter report on the gross domestic product. And central banks around the world were opening the floodgates, washing the financial markets in more cheap cash.

Then it all went wrong. It went wrong because of politicians. It went wrong because of democracy. And it's about to go wrong again if the bipartisan "supercommittee" in Congress fails to agree on at least $1.2 trillion in budget savings over the next 10 years through tax hikes and cuts to popular programs like Medicare and defense spending.

The committee's deadline is Nov. 23 -- a week from now. And hopes are not running high.

It's worth remembering that the economy looked ready to rev up in late June and early July, before the debt and deficit mess in Washington in August. And it looks like the politicians are ready to derail the nascent recovery. Again.

The European example

To put all the political wrangling in context, let's start in Europe.

On Oct. 31, then-Prime Minister George Papandreou of Greece, frustrated by a lack of political support and violent popular protests, shocked the world by announcing he would put the latest bailout plan -- the so-called "Oct. 26 agreement" -- to a binding vote by his people. The measure likely would have failed, in an act of democracy the financial world clearly feared.

Papandreou has since left office, and the shock waves of this move have reverberated through the world economy.

The European bond market has come under fresh attacks, pushing Italian bond yields to unsustainable levels -- a much more serious economic threat than Greece represents. Spanish, Belgian, Austrian and even French borrowing costs over German equivalents have also climbed as doubts grow over the financial health of all these countries. The eurozone's bailout fund, the vehicle that's supposed to put an end to the crisis once and for all, is having trouble raising cash. What was once unspeakable -- the removal of countries like Greece from the European Monetary Union -- is now being discussed in Berlin and Paris.

All this uncertainty and volatility comes with the eurozone rapidly falling into a deep, new recession. Eurozone industrial production dropped 2% in September from August. Worst hit was the capital goods sector. The latest eurozone purchasing managers survey points to a "sharp contraction" in economic output in the current quarter according to Capital Economics.

Recession will only worsen the debt crisis by deepening the deficits of Greece, Italy and others. America could meet a similar fate unless it acts swiftly to enact short-term stimulus and sensible medium-term measures to close the deficit focused, mainly, on out-of-control health care costs.

Politically impossible bills to pay

The reason the fallout was so swift and so severe is that Papandreou's gambit struck right at the point of weakness for the rich world's post-bubble economic reality: After years of living well off of cheap credit, the bill has come due in the form of harsh austerity -- something that's politically unpalatable.

Elected officials, who promised voters the world during the boom times, don't have the guts to do what's necessary now, in a time of tepid, post-crisis growth. Popular protests and fringe political movements, from deadly clashes in Athens to Spain's indignados and the rise of nationalist, euro-skeptic parties in places like Finland and Slovakia, only make it worse.

This is why the governments of both Greece and Italy have been replaced with unelected technocrats tasked with implementing painful spending cuts and tax increases before new elections are held. Free of the demands of democracy, these new leaders can do what elected leaders would not.

And they need to do it quickly. Unless Greece can secure its next batch of European Union/International Monetary Fund bailout cash, it will be bankrupt in a matter of weeks. In Italy, borrowing costs are on the same trajectory that doomed Greece, Ireland and Portugal. And now, the focus of the market's fury is shifting to other "core Europe" countries like Spain and France.