Last week the man in the street got exactly what he asked for ... at least in Bulgaria.For many days, thousands of anti-government protesters had been mobbing the streets of the capital city Sofia, chanting, "Everybody out."And indeed, a good part of the government simply quit last week with Prime Minister Boyko Borisov and his cabinet resigning and leaving the country essentially without leadership for the moment.While alleged corruption and rising electricity prices were mentioned, clearly the sharp reduction in government spending and public hand outs were a central issue. The country’s so-called ‘austerity measures’ had taken their toll as they have all across Europe and more recently in America.The word ‘austerity’ is defined by the Merriam-Webster dictionary as “the quality or state of being austere” which in turn is defined as being “stern and cold in appearance or manner”.The word ‘austerity’ conjures up visions of monks living in secluded monasteries bereft of entertainment and existing on a strict diet of bread and water while sleeping on cold wooden planks.Likewise in an economic sense, austerity is about governments getting back to the “bread and water” of balanced budgets, especially where runaway spending programmes are cut back until they finally begin approaching the amount of tax revenues collected. The goal is to stop incurring monthly deficits and mounting debt loads which ultimately crimp economic growth.Easier said than done. The Bulgarian backlash experience is perhaps more dramatic than most, but certainly not unique. The reality is that implementing government austerity is always unpopular; but as athletes say: “no pain, no gain.”For example, just a short while ago, America blundered through months of gut wrenching political wrangling before finally hammering out a thirteenth hour compromise and thus averting the full effect of the s0-called ‘fiscal cliff.’Expiring tax breaks at the time were the big concern; a lack of policy action before year-end would likely have thrown the world’s largest economy back into a recession.And now with the dust still settling from the New Year’s Day compromise fiasco, the US once again faces further bipartisan showdowns over both the debt ceiling and the implementation of automatic spending cuts in a process known as sequestration.On the debt ceiling, the way it works is that US Constitution requires Congress to approve any debt issued to pay for authorised spending programmes. At least that was the way the process worked from America’s inception until 1917. Then, during World War I, the country needed big bucks in a hurry to pay for its participation in the war. In order to facilitate faster access to needed funds, the debt ceiling became law.The debt ceiling was designed to give the Treasury greater flexibility to issue debt, but not as a no-limit credit card.Over time politicians being, well, politicians, caused the national debt to keep growing which forced the Treasury to periodically bump up against the latest ceiling amount. But at those times, Congress merely raised the debt ceiling, generally inflicting minimal damage to the economy or the financial markets.However, two notable exceptions were in 1995 and 1996 when debt ceiling impasses forced government shutdowns which created a few ripples in the financial markets for a short time.The debt ceiling debates again took centre stage in 2011 as a battlefield for the more fiscally conservative Republicans fighting back against President Obama and the Democrat-controlled Senate. Republicans who controlled Congress simply refused to raise the limit without a deficit-reduction package.Although the fierce political battle in 2011 cost America its AAA rating by the S&P credit agency, a deal was finally struck in July of that year. The plan called for automatic across-the-board spending cuts if no deal could be worked out for large-scale deficit reduction. So-called sequestration cuts were actually scheduled to take effect on January 1, 2013 targeting $85 billion in expenses, the first tranche of a $1.2 trillion spending cut programme.Without an approved plan, half the cuts are to come from the military defence budget and the other half from non-defense spending. The automatic cuts were part of last year’s fiscal cliff negotiations but the deadline was then pushed back to March 1, 2013 via the New Year’s Day compromise bill.Meanwhile, America’s deficit spending continues unabated and on the last day of 2012 the US reached its official debt ceiling limit of $16.4 trillion. Since then, the government has been operating under a loophole referred to by the Treasury as “extraordinary measures.”Earlier this year, it looked as though the debt ceiling showdown would begin anew, but Republicans led by House Speaker, John Boehner, ultimately passed legislation which extended the statutory borrowing limit until May.On the other hand, the sequestration debate, which is now separate from the debt ceiling negotiations have not yet been successfully postponed, leaving the automatic budget cuts still scheduled to begin next week, on March 1.As this goes to press, bipartisan leaders are scrambling to get something done to deflect the forthcoming $85 billion spending reduction programme while at the same time avoiding what may be perceived as the ‘political dysfunction’ in Washington’ by S&P when they notched America’s debt down to AA+ in 2011.Where we go from here is less certain, but clearly the world’s largest governments need to do what is inherently uncomfortable — become smaller and more efficient. Like getting lawyers to stop arguing, having politicians reduce their fiefdoms and stop buying favours seems almost hopelessly difficult just about everywhere.With the debt ceiling deadline postponed, at least for the moment the American deficit can is being kicked down the road. Equity markets have surged so far this year, but investors would be wise to remain selective.One risk reduction strategy is to carefully avoid those entities which stand directly in the way of government’s inevitable need to tighten its belt. Easy marks are those companies highly exposed to military defence spending and infrastructure projects. On the bullish side, those few countries around the world which have smaller deficits and/or a clear path toward solid budget management will likely stand out as favoured places to invest funds.Bryan Dooley, CFA is a senior fund manager at LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information.This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.