Thursday, February 18, 2010

Beijing Bails on Treasuries

from Financial Times:

If there is one thing that gets investors twitchy, it is the fear that China is losing its appetite for US government bonds.
As the biggest and most liquid pool of assets in the world, the US Treasury market lies at the heart of the global financial system and allows the American government to finance its trillion-dollar budget deficits. Until recently, China has been the largest foreign official holder of US debt.
That is why the latest release of Treasury International Capital (Tic) data, showing that China’s holdings of Treasuries fell by a record amount in December, has caused something of a stir.
China’s holdings fell by $34.2bn to $755.4bn from the previous month, prompting renewed jitters that the country was diversifying from Treasuries over fears about their future value.
China’s holdings have fallen from a peak of $801.5bn in May 2009, and the data come at a time of heightened political friction between Beijing and Washington over issues such as Barack Obama’s meeting with the Dalai Lama, US weapons sales to Taiwan, and pressure on China to revalue the renminbi.

“These developments require monitoring because they could cause China to become even less enthusiastic buyers of US Treasuries,” says Yasunari Ueno, chief economist at Mizuho Securities in Tokyo. “A key issue now is how China will act in 2010 in light of the deteriorating bilateral relationship with the US.”
China may have indeed started to rebalance its foreign reserve portfolio from US Treasuries, he says, having piled into the asset class after the collapse of Lehman Brothers in September 2008. But most analysts, including Mr Ueno, believe the December dip in China’s holdings of US Treasuries more likely has more mundane explanations. They also caution against reading too much into the Tic data, which is prone to big monthly swings and is subject to so-called transactional bias.

by Pat Buchanan on World Net Daily:

"I used to think it would take a great financial crisis to get both parties to the table, but we just had one," said G. William Hoagland, a former adviser to the Senate Republican leadership on fiscal policy.
"These days, I wonder if this country is even governable."
Quoted in the New York Times' lead story, "Party Gridlock Feeds New Fear of a Debt Crisis," Hoagland nailed it.
America faces a crisis of democracy.
At its heart is a fiscal crisis. After the 2009 deficit of $1.4 trillion, we are running a 2010 deficit of $1.6 trillion. Trillion-dollar deficits are projected through the Obama years, be they four or eight.
Long before 2016, however, holders of U.S. public debt will stop buying Treasury bills or start demanding higher interest rates to cover the growing risk of a default.
This week, a smoke detector went off. China, in December, had unloaded $45 billion of its $790 billion in T-bills. Is Beijing bailing out?
To assure the world we are not Greece writ large, the United States must soon adopt a visible plan for slashing the deficit.
There are three ways to do it. One is through growth that increases the tax revenue flowing into the Treasury and reduces the outflow for safety-net programs like unemployment insurance.
But growth only comes slowly and can take us only so far.
Needed is a combination of big budget cuts and tax hikes. But the only place one can get budget cuts of the magnitude required is from the big entitlement programs, Social Security, Medicare and Medicaid. And the only place to get revenue of that magnitude is by raising taxes on the American middle class.
And here is where Barack Obama hits the wall.
Republicans are not going to give him a single vote for a tax increase. Not only would this violate a commitment most made to the people who elected them, it would be politically suicidal. For behind the GOP today, and its best hope of recapturing Congress in 2010, are the tea-party irregulars.
And tea partiers now play the role of Red Army commissars who sat at machine guns behind their own troops to shoot down any soldier who retreated or ran. Republicans who sign on to tax hikes cannot go home again.
Consider: Arlen Specter voted for the Obama stimulus and faced an immediate primary challenge from Pat Toomey, who took a 20-point lead, forcing Specter to quit the party to survive. Popular Gov. Charlie Crist embraced Obama on a Florida visit and got an immediate primary challenge from Marco Rubio, who now looks to be the next senator from Florida.
The tea-party folks are not into the Gerald Ford politics of compromise and consensus. They have seen what it produces: the inexorable growth of government.
Ex-Sen. Alan Simpson, a Republican and co-chair of Obama's National Commission on Fiscal Responsibility, has challenged the patriotism of conservatives who plant their feet in concrete.
"There isn't a single sitting member of Congress – not one – that doesn't know exactly where we're headed. ... And to use the politics of fear and hate and division on each other – we're at a point right now where it doesn't make a damn whether you're a Democrat or a Republican, if you've forgotten you're an American."
Simpson is right in his assertion that anti-tax Republicans went along with George W. Bush's spending spree – for two wars, prescription drug benefits under Medicare and No Child Left Behind.
Where he is mistaken is in suggesting "fear and hate" are behind the opposition to tax hikes. History, principle and honest politics explain much of that hostility.
Ronald Reagan, who consented to tax hikes in the 1982 TEFRA bill, told this writer he was swindled. Promised three dollars in spending cuts for each dollar in tax increases, he got the reverse.
George H.W. Bush won election by pledging: "Read my lips! No new taxes!" He broke his pledge, leaving many of the faithful with egg all over their faces. That may have cost him the presidency.
Principled conservatives are resisting tax hikes because they believe government has grown too huge for the good of the country. And if that means putting the beast on a starvation diet – no new tax revenue to batten on – so be it. Cold turkey time.
Anticipating gains in November, Republicans will not give Obama any new taxes before then. After November, their ranks swollen by tea-party support, they will be even more intractable.
Where does that leave Obama – and us?
Later this year or early next, to avoid a debt crisis, Obama will ask Congress to raise taxes and pare back entitlement programs.
Republicans will fight the taxes to the last ditch. Democrats, having lost dozens of colleagues in the November massacre, will rebel against the cuts in social spending.
And a paralyzed government will drift closer toward the maelstrom.

"Can Anyone Say Unsustainable?" Mish Shedlock

from Mish Shedlock:
Inquiring minds are investigating Monthly Receipts, Outlays, and Deficit or Surplus, Fiscal Years 1981-2009 as published by the US Treasury on its Monthly Treasury Service report.

Here are a couple charts I produced off the downloadable spreadsheets.

Receipts vs. Outlays by Quarter 1999 Q1 Thru 2009 Q4

Deficit or Surplus by Quarter 1999 Q1 Thru 2009 Q4

click on either chart for sharper image

Receipts are back in the range of where they were in 2002-2003 while outlays have gone through the roof. Trendlines drawn by Excel. Notice the widening gap between receipts and outlays in the first chart.

Can anyone say "Unsustainable?"

"The worst thing in this world, next to anarchy, is government." -- Henry Ward Beecher

Grains Bounce Lower Off Upper Bollinger Bands

This chart is typical of the three major grains.

Dollar Continues Rise on Europe Worries

...But Then Stocks Shrug Off News, Head Higher

First-Time Unemployment Claims Jump -- Send Stocks Tumbling

CBO Understating Obama Deficits

( – Republicans railed against the Obama administration last month when the Congressional Budget Office (CBO) predicted a $6 trillion dollar deficit over the next decade. But an analysis by the Committee for a Responsible Federal Budget (CRFB), a taxpayer watchdog group, of President Obama’s proposed budget baseline for fiscal year 2011 points out it actually could spur more like $8.5 trillion in deficits.

PPI Surprises at 1.4%

That's 16.8% annualized! Ouch!

PPI Surprises at 1.4%

That's 16.8% annualized! Ouch!

John Hussman: Market Correction 80% Probability

John Hussman:

It's important to recognize that when I quote probabilities, I am generally using a form of Bayes' Rule. So when I say, for example, that I estimate a probability of about 80% of fresh credit difficulties accompanied by a market plunge over the coming year, that figure is based on various combinations of historical evidence, and what has (and has not) happened afterward, and how often. As a side note, a “market plunge” in this context need not be a “crash.” In the context of a credit-driven crash and rebound (which is what I believe we've observed), a typical post-rebound correction would be about -28%, but even that would take stocks to less than 20% above the March lows.

Pew Study: States Underfund Pensions By $1 Trillion

A $1 trillion gap. That is what exists between the $3.35 trillion in pension, health care and other retirement benefits states have promised their current and retired workers as of fiscal year 2008 and the $2.35 trillion they have on hand to pay for them, according to a new report by the Pew Center on the States.

Executive Summary

Pew’s figure actually is conservative, for two reasons. First, it counts total assets in state-run public sector retirement benefit systems as of the end of fiscal year 2008, which for most states ended on June 30, 2008—so the total does not represent the second half of that year, when states’ pension fund investments were devastated by the market downturn before recovering some ground in calendar year 2009.
Second, most states’ retirement systems allow for the “smoothing” of gains and losses over time, meaning that the pain of investment declines is felt over the course of several years. The funding gap will likely increase when the more than 25 percent loss states took in calendar year 2008 is factored in.
Second, most states’ retirement systems allow for the “smoothing” of gains and losses over time, meaning that the pain of investment declines is felt over the course of several years. The funding gap will likely increase when the more than 25 percent loss states took in calendar year 2008 is factored in.

Ka-Ching! Add another 1/2 trillion to the unfunded liabilities!

Wednesday, February 17, 2010

Are We Headed for a Debt Debacle?

two stories from FT:

Foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday.
China sold $34.2bn in US Treasury securities during the month, the US Treasury said on Tuesday, leaving Japan as the biggest holder of US government debt with $768.8bn. China overtook Japan as the largest holder in September 2008.
The shift in demand comes as countries retreat from the “flight to safety” strategy they embarked on upon during the worst of the global economic crisis and could mean the US will have to pay more to service its debt interest.
For China, the shedding of US debt marks a reversal that it signalled last year when it said it would begin to reduce some of its holdings. Any changes in its behaviour are politically sensitive because it is the biggest US trade partner and has helped to finance US deficits.
Alan Ruskin, a strategist at RBS Securities, said that China’s behaviour showed that it felt “saturated” with Treasury paper and that this is the sign of a trend. The change of sentiment could come at the detriment of the US dollar and the Treasury market as the US has to look to other countries for financing. Japan and the UK could pick up some of that slack and last month both added to their Treasury holdings. However, the overall monthly sell-off of $53bn was the biggest on record.

Fed governor's warning:

The US must fix its growing debt problems or risk a new financial crisis, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, warned on Tuesday, adding a mounting deficit could spur inflation.
Mr Hoenig said that rising debt was infringing on the central bank’s ability to fulfil its goals of maintaining price stability and long-term economic growth. “Stunning” deficit projections were putting political pressure on the Fed to keep interest rates low, infringing on its independence at the risk of inflation, he said.
“Without pre-emptive action, the US risks its next crisis,” Mr Hoenig said in a speech at the Pew-Peterson Commission on Budget Reform.
He was the only Fed member who dissented at last month’s meeting against language indicating that interest rates should remain near zero for an “extended period”.
On Tuesday he said that the worst option for the US was a scenario where the government “knocks on the central bank’s door” and asks it to print more money. Instead, the administration must find ways to cut spending and generate revenue. He called for a “reallocation of resources” and noted that the process would be painful and politically inconvenient.
The US budget deficit is projected to be $8,000bn (€5,800bn, £5,000bn) in the next decade. Barack Obama, US president, recently lifted the government’s borrowing authority to $14,300bn.
If the Fed succumbed to pressure to increase the money supply, Mr Hoenig said, inflation would lead to a loss of confidence in the dollar and in the economy. Meanwhile, a potential stalemate between the fiscal and monetary authorities that govern the economy could allow growing imbalances to go unchecked, thus raising the costs of borrowing and of capital for the US.
The hawkish Kansas Fed president also warned against “dire” consequences of the central bank prolonging its holdings of mortgage-backed securities, which it purchased in an effort to prop up the US housing market. Mr Hoenig painted a picture of a slippery slope, where a less independent Federal Reserve was asked to find ways to support other ailing sectors, such as agriculture.
The Federal Reserve is purchasing $1,250bn in MBS through March. Mr Hoenig said that it must shrink its balance sheet as quickly as possible while being careful and systematic.
Being pulled into the political framework has complicated the Fed’s job, which Mr Hoenig said should remain focused on the Fed funds rate and price stability.
Holding tightly to the notion of Fed independence, he rejected a suggestion published in a paper by Olivier Blanchard, chief economist at the International Monetary Fund, that central banks should set higher inflation targets. He also said he hoped to avoid political pressure to restore quantitative easing policies.
“That’s when independence will be more important than ever,” he said.

from AP:

WASHINGTON (AP) -- A record drop in foreign holdings of U.S. Treasury bills in December sent a reminder that the government might have to pay higher interest rates on its debt to continue to attract investors.
China reduced its stake and lost the position it's held for more than a year as the largest foreign holder of Treasury debt. Japan retook the top spot as it boosted its Treasury holdings.
The Treasury Department said foreign holdings of U.S. Treasury bills fell by a record $53 billion in December. That topped the previous record drop of $44.5 billion in April 2009.

Tuesday, February 16, 2010

Commercial Real Estate Endangers System

Greece R Us: The Rising Risk of U.S. Soverign Debt Default

Mauldin calls this newsletter, "Between Dire and Disastrous"

The news is somewhat “All Greece, All the Time,” but most of the pieces miss the more critical elements, and in today’s letter we will look at what I think those are, as well as at the important point that Greece is a precursor of a new era of sovereign risk. Plus, we glance at a few rather silly recent comments from economists. It will make for a very interesting discussion.

A Path-Dependent World
Path dependence explains how the set of decisions one faces for any given circumstance is limited by the decisions one has made in the past, even though past circumstances may no longer be relevant. In essence, history matters.
With regard to the future, the choices we make determine the paths we will take. As I have been writing for a long time, we have made a series of bad choices, often the easy choices, all over the developed world. We are now entering an era in which our choices are being limited by the nature of the markets. Not only are we in a path-dependent world, but the number of paths from which we may choose are becoming fewer with each passing year.
Our economic future is more and more a product of the political choices we make, and those are increasingly difficult. We have no good choices. We are left with choosing the best of bad options. Some countries, like Greece, are now down to choices that are either dire or disastrous. There is no “easy” button.
Let’s look at how Greece came to its current rather dismal predicament. And we will look at why it may be even worse than many pundits think.
First, we need to go back to the creation of the euro. Most of the Mediterranean countries that are now in trouble were allowed into the union with an exchange rate that overvalued their currencies relative to the northern countries, but especially to Germany. That meant that Greek consumers could buy products and services that previously may have been out of their reach.
Plus, with government debt at low rates, the Greek government could borrow more to finance deficit spending, without the threat of higher interest rates. And Greece began to increase its debt with abandon. Additionally, as it now turns out, Greece basically lied about its finances in order to gain admission to the union. It never complied with the fiscal discipline that was required for entrance.
With the high exchange rate, however, came the consequence of higher labor costs relative to, above all, Germany. While reviewing some economic facts about Greece, I came across the factoid that Greek workers had the second highest level of actual hours worked. But even with that, Greece was running a trade deficit that is currently 12.7% of its GDP.
And with the onset of the current recession, their fiscal deficit went from bad to worse.
Their total debt is now €254 billion, and they need to finance another €64 billion this year, €30 billion of it in the next few months.
Bottom line, without some help or a bailout, they simply will not be able to borrow that money. And since a lot of that money is for “rollover” debt, that means a potential for default if they cannot borrow it.
European leaders said today that Greece will not be allowed to fail, hinting of a bailout.
But there are a lot of “buts” and conditions.
Between Dire and Disastrous
While German Chancellor Merkel has indicated a willingness to help, the German finance minister and other politicians are suggesting German cooperation will either not be forthcoming or only be there at a very high price; and the price is a severe round of “austerity measures,” otherwise known as budget cuts. Greece is being told that it must cut its budget to an 8.7% deficit this year and down to 3% within three years.

For my American readers, let’s put that into perspective. That is the equivalent of a $560- billion-dollar US budget cut this year and another such cut next year. That would mean huge cuts in entitlements, Social Security, defense, education, wages, subsidies, and on and on. And repealing the Bush tax cuts? That would just be for starters. No “let’s freeze the budget” and try and grow our way out of it, as we effectively did in the ’90s, or gradually cutting the budget a few hundred billion a year while raising taxes. That combination of tax increases and budget cuts would guarantee a US recession. Unemployment, already high, would climb higher.

And yet, that is what the Greek government is being asked to do as the price for a bailout. A few facts about Greece. Some 30% of its economy is underground, meaning it is not taxed. In a country of 10 million people, only 6 (!!!!) people filed tax returns showing in excess of €1 million in income. Yet over 50% of GDP is government spending, and Greece has one of the highest public employee levels as a percentage of population in Europe. And its unions are very powerful. Nearly all of them have gone on strike over this proposal.
A National Suicide Pact
Now, here is where it actually gets worse. If Greece bites the bullet and makes the budget cuts, that means that nominal GDP will decline by (at least) 4-5% over the next 3 years. And tax revenues will also decline, even with tax increases, meaning that it will take even further cuts, over and above the ones contemplated to get to that magic 3% fiscal deficit to GDP that is required by the Maastricht Treaty. Anyone care to vote for depression?
And add into the equation that borrowing another €100 billion (at a minimum) over the next few years, while in the midst of that recession, will only add to the already huge debt and interest costs. It all amounts to what my friend Marshall Auerback calls a “national suicide pact.”
Normally, a country in such a situation would allow its currency to devalue, which would make its relative labor costs go down. But Greece is in a currency union, and can’t devalue. Or it would restructure its debt (think Brady bonds) to try and resolve the problem.
The dire predicament is the one where Greece cuts its budgets and more or less willingly enters into a rather long and deep recession/depression. The disastrous predicament is where they do not make the cuts and are allowed to default. That means the government is plunged into a situation where it has to cut the entire deficit to what it can get in the form of taxes and fees, immediately. As in right now. And defaulting on the interest on the current bonds wouldn’t be enough, although it would help.
Why not just let Greece go under? Part of the argument has to do with moral hazard. If Germany bails out Greece, Ireland, which is actually making such cuts to its budget, can legitimately ask, “Why not us?” And will Portugal be next? And Spain is too big for even Germany to bail out. At almost 20% unemployment, Spain has severe problems. Its banks are in bad shape, with large amounts of overvalued real estate on their books (sound familiar?) and a government fiscal deficit of almost 10%. While Spanish authorities say they can work this out, deficits will remain high.
The fear is one of contagion. Some argue that Greece is only 2.7% of European GDP. But Bear Stearns held less than 2% of US banking assets, and look what happened. I have been trading emails with Lisa Hintz of Moody’s, and she sent me the following note:
“It turns out from the BIS [Bank of International Settlements] numbers, that the largest holders of Greek debt are French, followed by the Swiss, although my guess is that a lot of that is hedged, and I don’t know that the BIS picks that up, and then the Germans. The numbers as of last June were France €86 billion, Switzerland €60bn, and Germany €44 billion. I have seen more recent numbers of France €73b, Switzerland €59b, and Germany €39b. In terms of GDP, for Germany it is minimal – just over 1%. Of more concern, for France it is nearly 3%, and for Belgium 2.5%. For Germany, the debts of Ireland, Portugal and Spain are much bigger problems. They may, however, worry that if there is a contagion, they will have to take marks on that debt. That would be a real problem – nearly 15x the size of the Greek issue.”
The recent credit crisis was over a few trillion in bad, mostly US, mortgage debts, with most of that at US banks. Greek debt is $350 billion, with about $270 billion of that spread among just three European countries and their banks. Make no mistake, a Greek default is another potential credit crisis in the making. As noted above, it is not just the writedown of Greek debt; it is the mark-to-market of other sovereign debt.
That would bankrupt the bulk of the European banking system, which is why it is unlikely to be allowed to happen. Just as the Fed (under Volker!) allowed US banks to mark up Latin American debt that had defaulted to its original loan value (and only slowly did they write it down; it took many years), I think the same thing will happen in Europe. Or the ECB will provide liquidity. Or there may be any of several other measures to keep things moving along.
But real mark-to-market? Unlikely.
The entire EU is faced with no good choices. It is coming down to that moment of crisis predicted by Milton Friedman so many years ago. And there is no agreement on what to do.
As Ambrose Evans-Pritchard wrote yesterday:
“The 27 leaders never even discussed how they might shore up Greece or the rest of Club Med. German Chancellor Angela Merkel said she was not willing to broach the subject at all. The only relevant topic was whether Greece was complying with Treaty obligations, and how the country would slash its budget deficit from 12.7pc to 8.7pc this year – in a slump.
“‘They offered nothing,’ said Jochen Felsenheimer, a credit expert at Assenagon in Frankfurt. ‘It was just words without any concrete measures, hoping to buy time.’
“Whether the EU has time is an open question. Credit Suisse says Greece must raise €30bn in debt by mid-year, mostly in April and May. Greek banks have been shut out of Europe's inter-dealer markets, forcing them to raise money at killer rates. They are suffering an erosion of deposits as rich Greeks shift money abroad. This could come to a head long before April.
“ ‘Economically, we are in a very risky situation. Greece is close to default. We face systemic risk like the Lehman collapse and unless there is a bail-out for Greece, there will have to be a bail-out for the whole European banking system within two or three months,’ he said.
“Yet they are damned if they don't, and damned if they do. ‘A Greek bail-out increases the risk of EMU break-up, because monetary union can only work if everybody sticks to the rules,’ Mr Felsenheimer said.”
There is talk among some in Europe of a more centralized control of some countries that do not stay within guidelines, which means that Greece might be asked to give up some of its sovereign freedoms in exchange for bailout funds. French President Sarkozy emphatically stated that no member of the EU would be allowed to default. But he did not bring a checkbook to the press conference. Selling this to a variety of national parliaments will not be easy, when they have their own problems.
And Merkel has problems on the home front. There are reports she is putting the brakes on a bailout, as she is getting pushback from her constituency. The Frankfurter Allgemeine Zeitung warned the chancellor yesterday that offering Greece any kind of bailout would be a betrayal of the trust of the Germans who so reluctantly traded in their marks for the euro. “If the no-bailout clause of the Maastricht Treaty is going to be abandoned, then the last anchor of a stable euro will be destroyed,” warned the front-page editorial in the conservative newspaper.
“Chancellor Merkel has to be hard now so that the euro doesn’t become soft.”
Ultimately, this is a political decision for the Greek people. They have roughly four options. They can accept the austerity measures and sink into a depression for a few years. This would mean the total amount of debt would go up rather significantly, putting a very large crimp on future budgets. Debt is a constraint on growth. Debt-to-GDP is already over 100%. A recent paper by Reinhart and Rogoff (authors of the book This Time It’s Different) shows that when government debt-to-GDP goes over 90%, it reduces future potential GDP by over 1%. That locks in a slow-growth, high-unemployment future in an economy already saddled with government spending at 50% of GDP, which is by definition a drag on GDP growth.
The second option is that they can simply default and go into a depression for more than a few years. This would have the advantage of reducing the debt burden, depending on what terms the government settled on. Would bond holders get 50 cents on the euro? 25 cents? Stay tuned. But it would also most assuredly mean they would not be able to get new debt for some time to come, forcing, as noted above, severe cuts in government spending. From one perspective, it has the potential advantage of reducing government’s share of the economy, which is a long-term good but a short-term nightmare. But it also keeps Greece in the euro zone, which does have advantages. However, it does little to deal with the labor-cost differentials.
The third option is that they could vote to leave the European Union. While this is unthinkable to most Europeans, it is an option that may appeal to some Greeks. They could create their own currency and effectively devalue their debt. It would make their labor and exports cheaper. They would still be shut out of debt markets for some time. Any savings left in Greece would be devalued overnight. Those on pensions would find their buying power cut by a great deal. It is likely that inflation would become an issue. And it would be a full-employment act for legions of attorneys.
Most people scoff at this notion, but money is flying out of Greek banks into non-Greek ones, and to my way of thinking that is a suggestion that some Greeks think secession might be a possibility. It is also causing severe stress at Greek banks.
The final option is to promise to make the budget cuts, get some form of guarantee on their bonds, and borrow enough to make it another year – but not actually cut as much as promised; just make some cuts and then promise more next year if you will just bail us out some more. That just kicks the problem down the road for another year or two, until European voters (mostly German) get tired of taking on Greek debt.
The market is not going to let Greece continue to borrow without showing some serious efforts at cutting their deficit, and probably not even then without some external guarantees. The history of Greek debt is not a good one. They have been in default 105 years out of the last 200.
There are some optimists, however. Good friend and fishing buddy David Kotok thinks that this will all turn out OK. Writing this week, he said, “Lastly, it is important to understand the territory of this issue. The 27 members of the EU and the 16 of them that are in the euro zone, and most of the other 11 that want to be in the euro zone, will coalesce and deal with Greek debt in the fiscal policy arena. Budget deficits will decline, although they may not decline as fast as projections. Economic growth will occur, although it may not be as fast as projected. Taxes will rise. Public sector employment benefits and compensation will be pressured to compress, and the workers will resist but eventually compromise. By the way, that will also happen at the
federal level in the United States and with the 50 sovereign state debtors that make up our country. Think of us as a US dollar zone, just as we think of them as a euro zone. They are new at it. We have had a century of practice and need only another few hundred years to get it right.”
My objection to that is, US states generally have a mandate to balance their budgets, so that the “debt-to-GDP” of a state is comparatively rather small. And a US citizen is ten times more likely to move from one state to another to find a job than a European will move to another country. As one person I read commented about unemployed Spanish workers in Madrid, “They won’t even move to Barcelona!”
It’s More than Just Greece
The lesson here? This is not just a Greek problem. Debt and out of control deficits are a problem all over the developed world. The Greeks are just the first. As Niall Ferguson wrote this week in the Financial Times, the contagion is headed to US shores unless we get our budget house in order. You cannot spend your way out of a fiscal crisis. The current path is simply unsustainable. At some point, we can become Greece. Yes, we have the advantage of having our debt denominated in dollars, but that is only an advantage up to a certain point.
The Nobel Prize economists (who will go nameless here) who say the US cannot default because our debt is in dollars miss the point. Being the world’s reserve currency just means we can run up bigger bills, but if we go the route of printing money to pay those bills, that is devaluation and fraud, as the value of a dollar will diminish; and that is tantamount to default.
Whether it is Japan or Portugal or the US or (pick a country), the body of evidence clearly shows that there is a limit to the amount of debt a sovereign country can handle without a crisis developing. That limit is different for each country, but there is a limit that the bond market will impose. And there are many countries in the developed world that are approaching that limit.

Monday, February 15, 2010

U.S. Debt to Cause Even Near-Term Crisis

WASHINGTON (AP) - It's bad enough that Greece's debt problems have rattled global financial markets. In the world's largest economic and military power, there's a far more serious debt dilemma. For the U.S., the crushing weight of its debt threatens to overwhelm everything the federal government does, even in the short-term, best-case financial scenario—a full recovery and a return to prerecession employment levels.
The government already has made so many promises to so many expanding "mandatory" programs. Just keeping these commitments, without major changes in taxing and spending, will lead to deficits that cannot be sustained.
Take Social Security, Medicare and other benefits. Add in interest payments on a national debt that now exceeds $12.3 trillion. It all will gobble up 80 percent of all federal revenues by 2020, government economists project.
That doesn't leave room for much else. What's left is the entire rest of the government, including military and homeland security spending, which has been protected and nurtured by the White House and Congress, regardless of the party in power.
The U.S. debt crisis also raises the question of how long the world's leading power can remain its largest borrower.
Moody's Investors Service recently warned that Washington's credit rating could be in jeopardy if the nation's finances didn't improve.
Despite election-year political pressure from voters for lawmakers to restrain spending, some recent votes suggests that Congress, left to its own devices, probably isn't up to the task of trimming deficits.

Eurozone Break-Up "Inevitable"

from Daily Mail:

The European single currency is facing an 'inevitable break-up' a leading French bank claimed yesterday.
Strategists at Paris-based Société Générale said that any bailout of the stricken Greek economy would only provide 'sticking plasters' to cover the deep- seated flaws in the eurozone bloc.
The stark warning came as the euro slipped further on the currency markets and dire growth figures raised the prospect of a 'double-dip' recession in the embattled zone.
Claims that the euro could be headed for total collapse are particularly striking when they come from one of the oldest and largest banks in France - a core founder-member.
In a note to investors, SocGen strategist Albert Edwards said: 'My own view is that there is little "help" that can be offered by the other eurozone nations other than temporary, confidence-giving "sticking plasters" before the ultimate denouement: the break-up of the eurozone.'
He added: 'Any "help" given to Greece merely delays the inevitable break-up of the eurozone.'