The news that Portugal has requested a bailout from the EU is hardly surprising. The outgoing socialist government, having wrecked the economy and emptied the government coffers, wants to tie down its center-right successor, due to be elected June 5. Similarly, when later this year Spain finds itself in similar or worse trouble and approaching an election in April 2012, you can be pretty sure that the corrupt Spanish socialist government will make the same choice. However Americans and Brits should not sneer: the inexorable forces of out-of-control fiscal and monetary policy will quickly bring both countries into the same unpalatable situation. Both countries have so far thought themselves immune because they control their own currency issuance, but in the long run, that is a technical rather than a fundamental difference.

Even the PIIGS (Portugal, Ireland, Italy, Greece, Spain) among the EU countries were no more profligate than Britain and the United States in the years before 2010. The difference, according to the markets, was that those countries had no control over their own currencies, but were forced to submit to the discipline of the European Central Bank, which was at least less manically monetarily expansionist than the Bank of England or the Fed. This lack of control, it was confidently explained, meant that the PIIGS could not devalue their currency or inflate their money supply in response to the “needs” of the deep recession.

Even with the bailouts, the future of Greece, Ireland and now Portugal looks doubtful. Greek GDP is expected to decline 4% this year and increase only fractionally next year, according to the Economist team of forecasters. Meanwhile the budget deficit is expected to be 8.1% of GDP. With debt already around 150% of GDP, the chances of a decent outcome that avoids outright default look doubtful, especially as European interest rates are beginning to rise (more on that later.)

The Greek problem is especially intractable because a right of center government was in office until October 2009, combining profligacy before the 2008 crash with excessive pre-election “stimulus” after it. The current socialist government thus cannot be blamed for the debacle (except ancestrally, as the prime minister is the son of the 1980s Marxist leader Andreas Papandreou, who began Greece’s slide to Brussels-subsidized ruin.) It has naturally used this lack of blameworthiness to protect its favored constituencies, even as they riot in the streets, making the budgetary axe lighter than it should have been. Still, at the moment there is nothing to be gained from a new election, even if there were any alternative government available that might remedy the problem. Thus default appears inevitable.

Ireland was only modestly badly run, but has had a real estate downturn that more resembles southern California or Nevada than the United States as a whole – the average house price in the first quarter of 2011 had fallen 43% from the peak. The central bank in its recent bank stress tests assumed a “base case” total drop of 55% and an “adverse case” drop of 63% from the peak. That’s a price decline of Great Depression proportions. Since Irish bank liabilities are over 300% of GDP, of which the Irish government foolishly guaranteed 250% in 2008, an EU rescue was inevitable.

However Ireland is not Greece; the remainder of the Irish economy is sound and competitive, and the problem becomes simply one of resolving who is to pay for a massive one-off loss. I have considerable sympathy with Irish taxpayers who feel that the foolish Irish government bailout of 2008 should not entirely fall on their shoulders, and that the dozy European banks who lent money to dishonest Ponzi schemes such as the Anglo-Irish Bank should be made to suffer at least part of the loss. I have however even more sympathy with the German taxpayers who feel that they at least should be held harmless.

As for Portugal, it can reasonably claim to have been unlucky; if Greece and Ireland had not previously required a bailout it would probably have escaped the need. The Portuguese socialist government of Jose Socrates can be blamed for the country’s problem through running up a budget deficit in 2008-09 and then not reducing it quickly enough when crisis occurred. The Portuguese political system was in the process of finding a solution, however, through the election to be held June 5, which will presumably restore the center-right to power. However, like Greece, Portugal must be reckoned at best a borderline case for independent survival; not only does it have an expected budget deficit of 7% of GDP, and expected GDP declines in both 2011 and 2012 but its payments deficit is expected to be 6.7% of GDP in 2011, suggesting that wages and living standards need to decline a substantial amount before the economy exports enough to support itself.

Portugal is the clearest case of a country that would have been fine without the euro. A devaluation of 30% or so would have given the country an inflation problem but would have brought Portuguese wage and other costs to a competitive level. Now the outgoing Socrates administration has called in the EU for help – doubtless hoping that any unpleasantly free-market nostrums desired by its successor will be stamped on by the institutionally leftist EU bureaucracy.

Now that Portugal has required a bailout, attention will turn to Spain. Spain combines both the Irish and Portuguese problems; a dozy overspending socialist government with the overhang of a real estate bubble. Unlike in Ireland, where price discovery in the housing market has operated with brutal efficiency, in Spain the necessary price decline has not happened. The real estate information website kyero.com has discovered that no less than 46% of Spanish house sellers have not discounted their property’s asking price after holding it on the market for 4-5 years. That strongly suggests the major blizzard of price declines – and mortgage defaults – has yet to happen, and that the Spanish banking system is in even worse trouble than people think.

Spain has relatively low public debt (as did Ireland before the crisis), a relic of the sensible governments before 2004. However it also has unemployment of an astounding 20.4%, most of whom presumably get handouts from the state. Add to this projected growth of only 0.5% and 1.1% in the next two years, a current account deficit of 3.6% of GDP and a budget deficit of 6.7% of GDP, and even with bank liabilities lower than Ireland at 250% of GDP, Spain looks likely to need a bailout also – probably this autumn, when like Portugal’s Socrates, Spain’s prime minister Jose Luis Rodriguez Zapatero will see an EU bailout as a useful way of hamstringing his free-market successor. Unlike Portugal, Spain’s major problem is not the balance of payments deficit per se, but its real estate overhang, and so currency independence, while it might have limited the bubble would not now solve its problems.

Rather than examining Italy and Belgium, both of which will be endangered if and when Spain is bailed out, we should instead examine the case of those other miscreants, who so far have thought themselves immune from PIIGERY because of their independent currencies: Britain and the United States. So far they have indeed been protected by the tsunami of money creation worldwide, but at some point this will have to stop. It isn’t stopping yet; contrary to the Financial Times’ view, a meager rise from 1% to 1¼% in the ECB policy rate does not constitute “the end of the loose monetary era” – with inflation at 2.6% real short-term rates remain heavily negative.

However as I have discussed earlier, inflation is about to bring down the hammer on the low-interest-rate era. Since both monetary and fiscal policies have been unprecedentedly sloppy for several years, the return of inflation will not be on tiptoe, like it was in the 1970s, but by something closer to a tsunami. Ben Bernanke will resist putting interest rates up to combat it for as long as he possibly can, claiming that it is ‘temporary” and attempting to get government statisticians to distort the figures even further, as they have done in Argentina. However eventually the bond market, compelled each year to absorb around $1.5 trillion of dodgy U.S. government paper (once Bernanke’s QEII is stopped), will collapse under the strain and force a change. Once Bernanke has been dragged kicking and screaming away from the levers of monetary policy, interest rates will be increased sharply to their proper levels, which by then may well be in the double-digit range or even higher. A similar process in Britain will defenestrate Bank of England Governor Mervyn King, and not before time.

Once inflation has returned in full force, the remedies of devaluation and monetary expansion (together with “quantitative easing” purchases of government debt) will no longer be available, because they would risk a near-term Weimar-style inflationary spiral. Inflation will magically reduce the value of past debt, but higher interest rates will enormously increase the costs of new debt, and therefore the deficit that must be financed.

In the United States at least the Treasury Department has very foolishly reduced the average maturity of U.S. Treasuries to a mere 4.8 years, down from 6 years a decade ago. That means over 20% of the Treasury debt outstanding must be rolled over each year, at the new higher interest rates. If the difference between the rates is that between 2.27% (the current yield on 5-year T-bonds) and say 10%, and debt is 97% of GDP (including that in the social security trust fund, which will need to be topped up with the higher inflation) then over five years the interest rate rise will increase the U.S. budget deficit by about 7.5% of GDP. That would take it from the Economist’s 2011 estimate of 9.9% of GDP to 17.4% of GDP, or about $2.5 trillion in current money (with “quantitative easing” unavailable.) A similar calculation can be performed for Britain, although part of the increase there would come from the spiraling costs of unfunded social security schemes and the National Health Service.

Because of the delusory fiscal and monetary policies of the last few years, the protection Britain and the United States would normally receive from issuing their own currencies will shortly disappear. The two countries will then be revealed as the biggest PIIGS of all.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)