My sentiments, exactly! Why did it take nearly 3 YEARS into his presidency for Obama to suddenly take an interest? Oh, that's right! Because the presidential election season is upon us!
by Andrew Malcolm at the LA Times:
Speaking on behalf of millions of Americans who've grown angry and frustrated over the president's 32-month ineffective inactivity on the job creation front, President Obama on Thursday told members of Congress they really have to do something about the crummy employment situation -- and do it quickly.
Citing the plight of millions of struggling Americans whose wishes for jobs Obama ignored for most of the 961 days he's been in office while chasing shinier healthcare and financial reforms, Obama said it was time that Congress stop blaming others. He said it was time members take responsibility for their inaction and halt their phony partisan games and political circus acts that pervade Washington culture.
Because the Americans Obama hasn't been listening to are really hurting now. And -- who's....
....counting? -- but it's only 424 days until Nov. 6, 2012. No plan yet to pay for Obama's ideas. But he wants immediate passage of his American Jobs Act anyway. Obama, whose Democratic spending priorities have pushed the national debt beyond $14,000,000,000,000, said it was important to curb spending and keep to the deficit reduction plan agreed to earlier this summer while also investing in, you know, many important things.
He then provided a joint session of Congress with a broadly ambitious list of goals that sounded to many people very much like a lot more spending, like, say, the $787 billion economic stimulus bill of 2009 that didn't stimulate much of anything except that national debt.
With the national debt already increasing $3 million every minute of every day, Obama wants to repair and modernize 35,000 schools. Obama wants $35 billion to go toward salaries for teachers, firefighters and police.
Obama wants $140 billion largely to update roads and bridges. Obama wants another $245 billion in business and individual tax relief. Obama also wants to extend unemployment benefits.
And Obama wants it all right now. Seriously. Now that his Martha's Vineyard vacation is over, this situation is urgent.
Obama didn't have room in his 4,021 word speech to mention how he intended to pay for all this new sounds-an-awful-like-increased-new-stimulus-spending-but-we're-not-using-that-word-anymore.
Aides said Americans should trust the president and sometime soon he would be outlining the finances that would not increase the national debt by one dime, honest.
Today in Virginia and next week in Ohio, Obama begins an aggressive autumn of travels selling his sounds-like-new-spending plans by day and fundraising by evening, bashing guess who for not solving the job crisis long ago.
Because like pretty much every sentient American, he knows full well there isn't one chance in Haiti of the divided Congress approving this package.
In fact, Obama's counting on that because grandiose program-proposing like this costs nothing-zero-nada, except the limo gas to the Capitol. Yet it gives perpetual candidate Obama tons of swell-sounding details to talk about during the 2011-12 reelection campaign.
Because he can't blame his mother-in-law for the nation's economic mess. When's the last time you heard a Harvard grad say, "Boy, did I blow that!" So, the only culprits left are in Congress, especially those Repugnicans.
But here's the catch that Obama and his Windy City wizards missed: Most Americans are not politically obedient machine Chicagoans. Like a linebacker reading the quarterback's eyes, they've already figured out this South Sider's game.
This week's ABC News/Washington Post Poll found that, based on their 961 days' experience with the current White House crowd, 47% say Obama's new economic program will have zero effect on the economy.
Worse politically, twice as many -- 34% vs 17% -- say Obama's plan will actually make matters worse, instead of better.
An NBC News/Wall Street Journal Poll the other day found 73% of Americans believe the nation is on the wrong track. That's 23 points more than felt that way at the beginning of summer.
Funny coincidence. The last time the revealing wrong track number was this high (78%) was in the autumn of 2008, just two weeks before Americans bought Obama's "Change to Believe In" line.
And they have the pink slips to prove it.
Showing posts with label fiscal policy. Show all posts
Showing posts with label fiscal policy. Show all posts
Friday, September 9, 2011
961 days in, Obama becomes sick and tired of someone dawdling about jobs
Wednesday, May 4, 2011
We've Reached Debt Saturation
Gordon Long is another favorite. He always gives me a different perspective that I need to heed.
From Gordon T. Long of Tipping Points
Debt Saturation & Money Illusion
Most of the clearly evident financial problems that surround us today stem from one cause - Debt Saturation.
Most, intuitively, sense this to be a correct assessment but few can either prove it or articulate it to the less sophisticated. Let me arm you to be the "Nostradamus" amongst your friends and colleagues in explaining the problem and what the future therefore foretells.
However, let me make it very clear, this will not make you popular. Smart maybe, but highly likely to make you unwanted at the social gatherings of the genteel.
The first thing you will need in your role of 'all seeing' is the back of an envelope, or a somewhat clean napkin at your next luncheon. You will need only a few simple facts to go along with your prop.
THE FACTS MAME, JUST THE FACTS!
First, if you could total the world's balance sheets you would find that it would approximate $200 Trillion. In putting together this total you would discover that 75% of all financial assets are debt assets worth $150 Trillion. To most of us, debt is the epitome of a liability. To banks, however, it is not. It is considered an asset and recorded as such a banks ledger. Your liability is their asset.
The historical debt payment over a long period of time is 6% per annum. The Federal Reserve's dividend payment to its holders of capital was originally established in 1913 at precisely this 6% and is still accrued accordingly. Remember also, in a fractional reserve, fiat based banking system money can only be loaned into existence.
Today we have approximately $9 Trillion (6% of $150T) in annual debt payments that must be absorbed annually by increased productivity of the working classes.
Consider that the US Economy at approximately $15 Trillion is 25% of the global economy. Therefore the global economy approximates $60 Trillion ($62T officially, but we will use round numbers so we don't lose anyone in the arithmetic).
The working class therefore has to increase productivity by $9T divided by $60T or 15% annually to absorb the current global usury charges.
In the last few years of explosive debt growth we have passed the point of the global economy being able to grow and improve productivity at a fast enough rate, not to be literally consumed by this existing debt burden.
Unfortunately, it gets worse.
One of the problems in using GDP as a measure of growth is that it includes government spending. In the case of the US, it is approaching 25% of the output of the country. Within that, approximately $3.7 Trillion is $490B in interest payments or 13% of US expenditures. This actually means that there is an additional 3% that must be added to the 15% or nearly 18%.
This is called Debt Saturation.
DIMINSHING MARGINAL PRODUCTIVITY.
A very unpopular chart to deficit spending hawks is the chart showing the change in GDP as a ratio to the change in debt. The easiest way to understand this chart is to consider how much the economy will grow for every dollar of increased debt. As you can see, the effect of increased debt has been steadily losing its ability to increase economic growth and since the financial crisis has decidedly turned negative.
The Korean Times recently illustrated that despite a booming Asian environment, technology firms are now struggling to cover interest payments. One in three firms on the Kosdaq failed to earn sufficient money to cover interest payments in 2010. The interest coverage ratio, otherwise dubbed times interest earned (TIE), refers to the measure of a firm’s ability to honor its debt payments. 280 out of 876 Kosdaq-listed outfits, or 32 percent, could not reach the benchmark reading of one in the interest coverage ratio.
TELLTALES OF DEBT SATURATION:
1- Non Performing Loans
The mal-investment is just too large to contain and is showing up in ever-increasing levels of non-performing loans. This is despite rolling over loans at false asset values.
Equally concerning is what is happening in Central and Eastern Europe where the change is 7%. I personally consider Central and Eastern Europe to be the unaddressed 'sub-prime' problem of Europe. I suspect it will eventually replace the PIIGS in financial media news coverage.
2- Chronic Unemployment
The money lenders look at unemployment in a different fashion than the average person and would have us easily confused by its adjustments, birth-death models and other deceiving statistics. To them it is not about how many of our fellow citizens are unemployed, but rather simply how many net new jobs are being created to pay for the annual usury assessment fee of the $9 Trillion we previously discussed. Herein lies their problem.
The internet has had a profound impact on the increase in productivity. Schumpeter's creative destruction is an engine running at full throttle. Vast swaths of jobs are being made obsolete through the adoption of new technology. The 'clerical' industry has almost disappeared in the span of 15 years through operational innovations such as supply chains. This has been tremendous for corporate profits allowing them to maintain highly leveraged balance sheets. The problem is that it has been solely at the expense of real job growth. No matter what a corporation does to make money, it eventually comes down to a consumer having the money to pay for the goods or services it produces.
We have reached the saturation point where we have insufficient real income growth to maintain the leveraged balance sheets of corporations. Government social nets are becoming burdened with making up the difference in either transfer payments (i.e.45 Million on food stamps in the US) or subsidies ( North Africa paying 28% of country budgets toward food subsidies for the unemployed population to survive). There are examples everywhere if you care to look. I have written extensively on this in my series on Innovation and in articles such as "Fearing the Gearing".
Debt Saturation occurs when aggregate income no longer supports debt burdens. When governments print money, eventually Money Velocity increases as people incorporate inflation expectations into their buying behavior. When we examine the Federal Reserve's Money Velocity statistics we see that something is very different this time.
Despite increases in MZM, M1 and M2 money velocity maintains its downward slope with little suggestion of wanting to reverse trend.
We presently have inflation in what people NEED along with shrinking real disposable incomes. Since people must pay for their NEEDS with short term money (cash, check or credit card), there is little ability for them to adjust to inflation when they are living from paycheck to paycheck. If their disposable incomes were higher they would stockpile and turn their money over faster. Additionally, money as a multiplier would flow through our society. Instead, today the money does not move through multiple hands but is returned almost immediately to the banks as debt payment, since most intermediaries are also burdened with debt.
WHAT YOU MUST BE AWARE OF
First, You must understand the impact of mal-investments and the brake that debt is now applying to the Global Economy.World Real GDP, adjusted for inflation on a year-over-year basis has plummeted. According to the World Bank this growth indicator has gone negative with the world's real GDP actually shrinking Y-o-Y.
The global growth engine has not only stalled but has clearly hit an unexpected brick wall.
Secondly, You must understand the significance of the stalled and possibly fatally ill "Shadow Banking" Credit Engine.
Similar to moving about on an airplane or train it is hard to determine the speed you are traveling, because you have a limited frame of reference. In a casual conversation with your fellow travelers it is easily forgotten or unnoticed that you are moving at a rapid speed. This is the situation we find ourselves in as the Shadow Banking System fails to rebound and the debt it once created is not being replaced. The liabilities of the Shadow Banking System are shrinking. These leveraged liabilities are now shrinking the global money supply despite every effort of central banks to combat it. The Central Banks are losing the battle. Like glacial tectonic shifts they are undermining the abilities of financial institutions to continue to carry and roll-over non performing debt.
The overlay below of the Nominal and Real (ShadowStats inflation-adjusted) Dow illustrates the concept of Money Illusion, the tendency of people to think of currency in nominal, rather than real, terms. Below the Dow series is the Consumer Price Index (CPI) from 1913 and with estimates for the earlier years.
The chart above is adjusted for inflation based on published CPI numbers. If ShadowStats inflation numbers are used, as is the case in the above chart, then the chart to the right would more clearly resemble longer term secular bear markets already experienced.
CONCLUSION
There is nothing magic in any of this and it has all been well documented, unfortunately by the Russians when they studied the capitalist system to identify its fundamental weaknesses. The Kondratieff long wave shows that the capitalist system suffers the build up and purging of debt on a generational basis on the frequency approaching 55 year cycles. We have extended this natural cycle by means of un-natural acts which I have written about in my extensive "Extend & Pretend" series of articles. Even in the days of old the king resorted to "jubilee" to cleanse the system. Of course we are much too sophisticated for such a simple solution today.
We have papered over the realities of "Too Big to Fail" by not allowing the proven tenets of capitalism to work. We have Anti-trust laws under the Sherman act to address 'too big', Control Fraud Laws to address questionable ethical behavior for the sake of profit (like mortgage fraud, liars loans etc) and Bankruptcy laws to liquidate failed enterprises to force debt holders to take haircuts and swap debt for equity. Instead we allow the prevalent game of Regulatory Arbitrage to run without restriction or detection. Existing laws are not being exercised in an attempt to protect what amounts to the emergence of a crony capitalist system. Benito Mussolini had a somewhat different world for the merging of corporate and government interests that I will leave for readers to recollect who have a historical penchant. It is not a word easily digested in the polite 'cocktail chatter' of today's genteel upper middle class.
Welcome to Kondratieff's Long Wave Cycle
In your new role as 'Nostradamus' to your friends you can safely predict a decade ahead to be a secular bear market in financial assets, in real terms. Nominal values may not show this clearly but it will be very evident in the reduced standard of living most Americans will experience.
You are going to have to work harder and harder, for less and less to survive at a lower and lower standard of living.
This will all be required to support the annual $9T debt bondage we have assumed as our politicos add additional 'stimulus' to a suffocating and debt saturated global economy.
Tuesday, May 3, 2011
David Walker: Seeking to Restore Fiscal Health of the United States
Two hundred and twenty two years ago, the American Republic was founded. The United States had defeated the world’s most powerful military force to win independence, and over a several year period, went about creating a federal government based on certain key principles, including limited government, individual liberty, and fiscal responsibility. That government was established by what is arguably the world's greatest political document - the United States Constitution.
Our nation's founders understood the difference between opportunity and entitlement. They believed in certain key values including the prudence of thrift, savings and limited debt. They took seriously their stewardship obligation to the country and future generations of Americans.
The truth is, we have strayed from these key, time-tested principles and values in recent decades. We must return to them if we want to keep America great and help to ensure that our future is better than our past.
Believe it or not, to win our independence and achieve ratification of the U.S. Constitution, the U.S. only had to go into total federal and state debt equal to 40 percent of the size of its then fledgling economy. Fast forward to today, when the U.S. is the largest economy on earth and a global superpower – but total federal debt alone is almost 100 percent of the economy and growing rapidly. Add in state and local debt, and the total number is about three times as much as the total debt we held at the beginning of our Republic – and it is headed up rapidly. As the below graphic shows, our total federal debt has more than doubled in just the past ten and a half years.
America has gone from the world's leading creditor nation to the world's largest debtor nation. We have also become unduly dependent on foreign nations to finance our excess consumption. Many of these foreign investors have shunned our long-term debt due to concerns over future interest rates and the longer-term value of the dollar. And PIMCO, the largest Treasury bond manager in the U.S., also recently sold their Treasury security holdings due to a lack of adequate return for the related interest rate risk.
And who is now the largest holder of Treasury securities? It's the Federal Reserve. I call that self-dealing. The Fed may be able to hold down interest rates for a period of time; however, they cannot hold them down forever. The Fed's debt purchase actions are just another example of how Washington policymakers take steps to provide short-term gain while failing to take steps to avoid the longer-term pain that will surely come if we fail to put our nation's fiscal and monetary policies in order.
Fiscal space represents the amount of additional debt a country could theoretically issue before a fiscal crisis is imminent. Fiscal path is an estimate of the number of years before a country will hit its theoretical maximum debt capacity. (The U.S. will hit its maximum within16 years, but will enter a “fiscal danger zone” within 2-3 years). Fiscal governance is a value based on the strength of a government’s institutions, as well as its transparency and accountability to its citizens. Unfortunately, the U.S. ranks far below the average in all three of these categories – in particular, the fiscal governance category.
The overall SFRI index showed that the U.S. ranked 28 out of 34 nations in the area of fiscal responsibility and sustainability. And when you see which countries rank around us, it's clear that we’re in a bad neighborhood. We’re only a few notches above countries like Greece, Ireland, and Portugal, all of which have recently suffered severe debt crises. That report also showed that the U.S. could face a debt crisis as soon as two to three years from now, given our present path and interest rate risk. Below is the full list of rankings.
On the positive side, the CAI and Stanford report showed that if Congress and the President were able to work together to pass fiscal reforms that were the "bottom line" fiscal equivalent of those recommended by the National Fiscal Responsibility and Reform Commission last year, our nation's ranking would improve dramatically, to number 8 out of 34 nations. In addition, we would achieve fiscal sustainability for over 40 years!
So what are our elected officials waiting for? Do they want a debt crisis to force them to make very sudden and possibly draconian changes? If not, they need to wake up and work together to make tough choices. That’s what New Zealand did in the early 1990s, when that country faced a currency crisis. Due to tough choices then and persistence over time, New Zealand now ranks number 2 in the SFRI - second only to Australia, which the Kiwis are not happy about! If New Zealand can do it, America can too!
House Budget Committee Chairman Paul Ryan recently demonstrated the political courage to lead in connection with our nation's huge deficit and debt challenges. His budget proposal recognizes that restoring fiscal sustainability will require tough transformational changes in many areas, including spending programs and tax policies. Chairman Ryan's proposal includes several major reform proposals, especially in the area of health care. For example, he proposes to convert Medicare to a premium support model that will provide more individual choice, limit the government's long-term financial commitment and focus government support more on those who truly need it. He also proposed to employ a block grant approach to Medicaid in order to provide more flexibility to the states and limit the governments' financial exposure. These concepts have varying degrees of merit; however, how they are designed and implemented involve key questions of social equity that need to be carefully explored. And contrary to Chairman Ryan’s proposal, additional defense and other security cuts that do not compromise national security and comprehensive tax reform that raises more revenue as compared to historical levels of GDP also need to be on the table in order to help ensure bipartisan support for any comprehensive fiscal reform proposal.
The President and Congressional leaders should be commended for reaching an agreement that averted a partial shutdown of the federal government and resolved funding levels for fiscal 2011. While it took way too much time and effort, this compromise involved real concessions from both sides and represents a small yet positive step towards restoring fiscal responsibility. But this action is far from the most important fiscal challenge facing both the Congress and the President. After all, Washington policymakers took about 88 percent of federal spending, along with much-needed federal tax reforms, "off the table" during the recent debate over the 2011 budget. In essence, they have been arguing over the bar tab on the Titanic when we can see the huge iceberg that lies ahead. The ice that is below the surface is comprised of tens of trillions of dollars in unfunded Medicare, Social Security and other off-balance sheet obligations along with other commitments and contingencies that could sink our "Ship of State". It is, therefore, critically important that we change course before we experience a collision that could have catastrophic consequences. As you can see in the series of pie charts below, mandatory programs like Social Security and Medicare already take up the largest share of the federal budget and, absent a change in course, will continue to do so in increasing amounts in the next several decades.
In essence, raising the debt ceiling is simply recognizing the federal government’s past fiscally irresponsible practices. But while federal law provides for the continuation of essential government operations even if the government has not decided on a budget or funding levels for a fiscal year, such a provision does not exist in connection with the debt ceiling. Therefore, if the federal government hits the debt ceiling during a time of large deficits, which is the case today, dramatic and draconian actions will have to be taken to ensure that additional debt is not incurred. This would likely include a suspension of payments to government contractors, delays in tax refunds, and massive furloughs of government employees. In addition, since Social Security is now paying out more in benefits than it receives in taxes, the monthly payments may not go out on time if we hit the debt ceiling limit. That would clearly get the attention of tens of millions of Americans, including elected officials.
However, although failure to raise the debt ceiling is not a viable option given our current fiscal state, we must take concrete steps to address the government’s lack of fiscal responsibility. We must also do so in a manner that avoids triggering a massive disruption and a possible loss of confidence by investors in the ability of the federal government to manage its own finances. Such a loss of confidence could spur a dramatic rise in interest rates that would further increase our nation's fiscal, economic, unemployment and other challenges.
In order to begin to restore fiscal sanity, Congress could increase the debt ceiling limit in exchange for one or more specific steps designed to send a signal to the markets, and the American people, that a new day in federal finance is dawning. To be credible, any such action must go beyond short-term spending cuts for the 2012 fiscal year. The debt/GDP trigger and automatic enforcement concepts I advocate above are one specific step Congress could take.
The S&P's revised outlook on the long-term rating for U.S. sovereign debt should be yet another wake-up call for elected officials and other policymakers in Washington. S&P's action serves as a market-based signal that independent ratings agencies believe the U.S. is on an imprudent and unsustainable fiscal path and that action is needed in order to maintain investor confidence. In my view, this action should have been taken place some time ago; however, it is now likely that other rating agencies will reconsider their ratings positions on U.S. Sovereign debt.
Given President Kennedy's admonition, liberals need to acknowledge that we need to renegotiate the current social insurance contract. For example, contrary to assertions by some, Social Security is now adding to the federal deficit and is underfunded by about $8 trillion. As you can see below, it will face escalating annual deficits beginning in 2015.
There is no debate that last year's health care reform legislation will result in higher federal health care costs as a percentage of the economy. (See the chart below). In addition, according to Medicare's independent Chief Actuary, based on reasonable and sustainable assumptions, last year's health care reform legislation will end up exacerbating our deficit and debt challenges rather than helping to lessen them. He estimated that the cost of the health care law to the Medicare program could be over $12 trillion in current dollars more than advertised.
Conservatives need to acknowledge that we can't just grow our way out of our fiscal hole. They need to admit that all tax cuts are not equal and there is plenty of room to cut defense and other security spending without compromising our national security. And while conservatives are correct to say that our nation's fiscal challenge is primarily a spending problem, they must recognize that some additional revenues will be needed to restore fiscal sanity. The math just doesn't work otherwise.
All parties must acknowledge that we can't inflate our way out of our problem and that we must take steps to improve our nation's competitive posture. This means that some properly targeted and effectively implemented critical infrastructure and other investments may be both needed and appropriate even if they exacerbate our short-term fiscal challenge.
Washington policymakers need to understand that the same four factors that caused the recent financial crisis exist for the federal government's own finances. And what are those factors?
First, a disconnect between those who benefit from prevailing policies and practices and those who will pay the price and bear the burden if and when the bubble bursts. Second, a lack of adequate transparency and accountability in connection with the true financial risks that we face. Third, too much debt, not enough focus on cash flow, and an over-reliance on narrow and myopic credit ratings. Finally, a failure of responsible parties to act until a crisis was at the doorstep.
There is growing agreement that the greatest threat to our nation's future is our own fiscal irresponsibility. In fact, as I noted in 2007 and Joint Chiefs Chairman Admiral Mullin stated last year, our fiscal irresponsibility and resulting debt is a national security issue. After all, if you don't keep your economy strong for both today and tomorrow, America's standing in the world and standard of living at home will both suffer over time – and waiting for a crisis before we act could also undermine our domestic tranquility.
Spending levels certainly need to be cut. After all, the base levels of federal discretionary spending increased by over 30 percent between 2007 and 2010 during a time of low inflation. At the same time, all parties must be realistic regarding how much should be cut and how quickly it can be achieved. In my view, we should be targeting greater cuts than have been recently considered, but over a longer period of time: for example, real spending cuts of $125-$150 billion over several years. If we did so, the related savings would be significant and would compound over time.
As the National Fiscal Responsibility and Reform Commission, CAI, The No Labels political movement (of which I am a co-founder), and others have noted, everything must be on the table – and all political leaders need to be at the table – in order to put our nation on a more prudent and sustainable fiscal path. This includes a range of social insurance program reforms, defense and other spending cuts, and comprehensive tax reform that generates additional revenues, including both individual and corporate tax reform. We must keep in mind that the private sector is the engine of innovation, growth, and jobs. In addition, many businesses are taxed at the individual, rather than the corporate, level.
Realistically, it will take us a number of years to get back into fiscal shape. And while it would be great if we could do a "grand bargain" and enact a broad range of transformational reforms in one step, that just isn't realistic in today's world. Therefore, what is a reasonable order of battle to win the war for our fiscal future?
First and foremost we need to enact budget process reforms, re-impose the type of budget controls and engage in the fact-based citizen education and engagement effort referred to previously. The next order of battle items should be corporate tax reform and Social Security reform. Why corporate tax reform? Because it can help to improve our competitiveness, enhance economic growth and generate jobs.
And why Social Security reform? Because we have a chance to make this important social insurance program solvent, sustainable and secure for both current and future generations. We can also exceed the expectations of all generations and demonstrate to both the markets and the American people that Washington can act before a crisis forces it too.
The above efforts should be followed by broader tax reform and Medicare/Medicaid reforms. We will then need to rationalize our health care promises and focus more on reducing health care costs in another round of health care legislation. We must also begin a multi-year effort to re-baseline the federal government's organizations, operations, programs and policies to make them more future focused, results oriented, affordable and sustainable.
In summary, the truth is that the government has grown too big, promised too much and waited too long to restructure. Our fiscal clock is ticking and time is not working in our favor. The Moment of Truth is rapidly approaching. As it does, let us hope that our elected officials must keep the words of Theodore Roosevelt in mind: “In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” And "We the People" must do our part by insisting on action and by making the price of doing nothing greater than the price of doing something We must insist that our legislators offer specific solutions to defuse our ticking debt bomb in a manner that is economically sensible, socially equitable, culturally acceptable, and politically feasible We need to recognize that improving our fiscal health, just like our physical health, will require some short-term pain for greater long-term gain. The same is true for state and local governments.
We'll soon know whether Washington policymakers are up to the challenge and whether they will start focusing more of doing their job than keeping their job. They need to focus first on their country rather than their party. And yes, the President and Congressional leaders from both political parties need to be at the table and everything must be on the table in order to achieve sustainable success. Let's hope they make the right choice this time!
All of us who are involved with the Comeback America Initiative (CAI) will do our part. All that we ask is that you do yours. The future of our country, communities and families depends on it.
For more information about the Comeback America Initiative and No Labels, check out www.tcaii.org and www.nolabels.org.
Our nation's founders understood the difference between opportunity and entitlement. They believed in certain key values including the prudence of thrift, savings and limited debt. They took seriously their stewardship obligation to the country and future generations of Americans.
The truth is, we have strayed from these key, time-tested principles and values in recent decades. We must return to them if we want to keep America great and help to ensure that our future is better than our past.
Believe it or not, to win our independence and achieve ratification of the U.S. Constitution, the U.S. only had to go into total federal and state debt equal to 40 percent of the size of its then fledgling economy. Fast forward to today, when the U.S. is the largest economy on earth and a global superpower – but total federal debt alone is almost 100 percent of the economy and growing rapidly. Add in state and local debt, and the total number is about three times as much as the total debt we held at the beginning of our Republic – and it is headed up rapidly. As the below graphic shows, our total federal debt has more than doubled in just the past ten and a half years.
America has gone from the world's leading creditor nation to the world's largest debtor nation. We have also become unduly dependent on foreign nations to finance our excess consumption. Many of these foreign investors have shunned our long-term debt due to concerns over future interest rates and the longer-term value of the dollar. And PIMCO, the largest Treasury bond manager in the U.S., also recently sold their Treasury security holdings due to a lack of adequate return for the related interest rate risk.
And who is now the largest holder of Treasury securities? It's the Federal Reserve. I call that self-dealing. The Fed may be able to hold down interest rates for a period of time; however, they cannot hold them down forever. The Fed's debt purchase actions are just another example of how Washington policymakers take steps to provide short-term gain while failing to take steps to avoid the longer-term pain that will surely come if we fail to put our nation's fiscal and monetary policies in order.
The Fiscal Fitness Index
In March 2011 the Comeback America Initiative (CAI) and Stanford University released a new Sovereign Fiscal Responsibility Index (SFRI) - or as my wife Mary refers to it, a Fiscal Fitness Index. We calculated each country’s SFRI based on three factors – fiscal space, fiscal path, and fiscal governance.Fiscal space represents the amount of additional debt a country could theoretically issue before a fiscal crisis is imminent. Fiscal path is an estimate of the number of years before a country will hit its theoretical maximum debt capacity. (The U.S. will hit its maximum within16 years, but will enter a “fiscal danger zone” within 2-3 years). Fiscal governance is a value based on the strength of a government’s institutions, as well as its transparency and accountability to its citizens. Unfortunately, the U.S. ranks far below the average in all three of these categories – in particular, the fiscal governance category.
The overall SFRI index showed that the U.S. ranked 28 out of 34 nations in the area of fiscal responsibility and sustainability. And when you see which countries rank around us, it's clear that we’re in a bad neighborhood. We’re only a few notches above countries like Greece, Ireland, and Portugal, all of which have recently suffered severe debt crises. That report also showed that the U.S. could face a debt crisis as soon as two to three years from now, given our present path and interest rate risk. Below is the full list of rankings.
On the positive side, the CAI and Stanford report showed that if Congress and the President were able to work together to pass fiscal reforms that were the "bottom line" fiscal equivalent of those recommended by the National Fiscal Responsibility and Reform Commission last year, our nation's ranking would improve dramatically, to number 8 out of 34 nations. In addition, we would achieve fiscal sustainability for over 40 years!
So what are our elected officials waiting for? Do they want a debt crisis to force them to make very sudden and possibly draconian changes? If not, they need to wake up and work together to make tough choices. That’s what New Zealand did in the early 1990s, when that country faced a currency crisis. Due to tough choices then and persistence over time, New Zealand now ranks number 2 in the SFRI - second only to Australia, which the Kiwis are not happy about! If New Zealand can do it, America can too!
The Recent Budget Policy Proposals
In order for us to begin to restore fiscal sanity to this country, President Obama has to discharge his leadership responsibilities as CEO of the United States Government. He got into the game with his fiscal speech on April 13, in which he largely embraced the work of his National Fiscal Responsibility and Reform Commission, although with a longer timeframe for implementation and less specifics on entitlement reforms. The President also endorsed the debt/GDP trigger and automatic enforcement concept that CAI had been advocating. Under this concept, Congress could agree on a set of statutory budget controls that would come into effect in fiscal 2013. Such controls should include specific annual debt/GDP targets with automatic spending cuts and temporary revenue increases in the event the annual target is not met. In my view, a ratio of three parts spending cuts, excluding interest savings, to one part revenue would make sense.House Budget Committee Chairman Paul Ryan recently demonstrated the political courage to lead in connection with our nation's huge deficit and debt challenges. His budget proposal recognizes that restoring fiscal sustainability will require tough transformational changes in many areas, including spending programs and tax policies. Chairman Ryan's proposal includes several major reform proposals, especially in the area of health care. For example, he proposes to convert Medicare to a premium support model that will provide more individual choice, limit the government's long-term financial commitment and focus government support more on those who truly need it. He also proposed to employ a block grant approach to Medicaid in order to provide more flexibility to the states and limit the governments' financial exposure. These concepts have varying degrees of merit; however, how they are designed and implemented involve key questions of social equity that need to be carefully explored. And contrary to Chairman Ryan’s proposal, additional defense and other security cuts that do not compromise national security and comprehensive tax reform that raises more revenue as compared to historical levels of GDP also need to be on the table in order to help ensure bipartisan support for any comprehensive fiscal reform proposal.
The President and Congressional leaders should be commended for reaching an agreement that averted a partial shutdown of the federal government and resolved funding levels for fiscal 2011. While it took way too much time and effort, this compromise involved real concessions from both sides and represents a small yet positive step towards restoring fiscal responsibility. But this action is far from the most important fiscal challenge facing both the Congress and the President. After all, Washington policymakers took about 88 percent of federal spending, along with much-needed federal tax reforms, "off the table" during the recent debate over the 2011 budget. In essence, they have been arguing over the bar tab on the Titanic when we can see the huge iceberg that lies ahead. The ice that is below the surface is comprised of tens of trillions of dollars in unfunded Medicare, Social Security and other off-balance sheet obligations along with other commitments and contingencies that could sink our "Ship of State". It is, therefore, critically important that we change course before we experience a collision that could have catastrophic consequences. As you can see in the series of pie charts below, mandatory programs like Social Security and Medicare already take up the largest share of the federal budget and, absent a change in course, will continue to do so in increasing amounts in the next several decades.
The Federal Debt Ceiling Limit
Now that the level of federal funding for the 2011 fiscal year has been resolved, there has been an increasing amount of attention on Congress’ upcoming vote to increase the federal debt ceiling limit. As is evident by the chart below detailing the debt ceiling limit per capita adjusted for inflation since 1940, the U.S. started losing its way in the early 1980s. Fiscal responsibility was temporarily restored during the 1990s, when statutory budget controls were in place, but things went out of control again in 2003, the year after those budget controls expired.In essence, raising the debt ceiling is simply recognizing the federal government’s past fiscally irresponsible practices. But while federal law provides for the continuation of essential government operations even if the government has not decided on a budget or funding levels for a fiscal year, such a provision does not exist in connection with the debt ceiling. Therefore, if the federal government hits the debt ceiling during a time of large deficits, which is the case today, dramatic and draconian actions will have to be taken to ensure that additional debt is not incurred. This would likely include a suspension of payments to government contractors, delays in tax refunds, and massive furloughs of government employees. In addition, since Social Security is now paying out more in benefits than it receives in taxes, the monthly payments may not go out on time if we hit the debt ceiling limit. That would clearly get the attention of tens of millions of Americans, including elected officials.
However, although failure to raise the debt ceiling is not a viable option given our current fiscal state, we must take concrete steps to address the government’s lack of fiscal responsibility. We must also do so in a manner that avoids triggering a massive disruption and a possible loss of confidence by investors in the ability of the federal government to manage its own finances. Such a loss of confidence could spur a dramatic rise in interest rates that would further increase our nation's fiscal, economic, unemployment and other challenges.
In order to begin to restore fiscal sanity, Congress could increase the debt ceiling limit in exchange for one or more specific steps designed to send a signal to the markets, and the American people, that a new day in federal finance is dawning. To be credible, any such action must go beyond short-term spending cuts for the 2012 fiscal year. The debt/GDP trigger and automatic enforcement concepts I advocate above are one specific step Congress could take.
The S&P's revised outlook on the long-term rating for U.S. sovereign debt should be yet another wake-up call for elected officials and other policymakers in Washington. S&P's action serves as a market-based signal that independent ratings agencies believe the U.S. is on an imprudent and unsustainable fiscal path and that action is needed in order to maintain investor confidence. In my view, this action should have been taken place some time ago; however, it is now likely that other rating agencies will reconsider their ratings positions on U.S. Sovereign debt.
Moving Past Partisan Politics
The American people need to understand that doing nothing to address our deteriorating financial condition and huge structural deficits is simply not an option. Failure to act will serve to threaten America's future position in the world and our standard of living at home. Therefore, both major political parties must come to the table and put aside their sacred cows and unrealistic expectations. As John F. Kennedy said, “The great enemy of the truth is very often not the lie — deliberate, contrived and dishonest — but the myth — persistent, persuasive, and unrealistic.”Given President Kennedy's admonition, liberals need to acknowledge that we need to renegotiate the current social insurance contract. For example, contrary to assertions by some, Social Security is now adding to the federal deficit and is underfunded by about $8 trillion. As you can see below, it will face escalating annual deficits beginning in 2015.
There is no debate that last year's health care reform legislation will result in higher federal health care costs as a percentage of the economy. (See the chart below). In addition, according to Medicare's independent Chief Actuary, based on reasonable and sustainable assumptions, last year's health care reform legislation will end up exacerbating our deficit and debt challenges rather than helping to lessen them. He estimated that the cost of the health care law to the Medicare program could be over $12 trillion in current dollars more than advertised.
Conservatives need to acknowledge that we can't just grow our way out of our fiscal hole. They need to admit that all tax cuts are not equal and there is plenty of room to cut defense and other security spending without compromising our national security. And while conservatives are correct to say that our nation's fiscal challenge is primarily a spending problem, they must recognize that some additional revenues will be needed to restore fiscal sanity. The math just doesn't work otherwise.
All parties must acknowledge that we can't inflate our way out of our problem and that we must take steps to improve our nation's competitive posture. This means that some properly targeted and effectively implemented critical infrastructure and other investments may be both needed and appropriate even if they exacerbate our short-term fiscal challenge.
Washington policymakers need to understand that the same four factors that caused the recent financial crisis exist for the federal government's own finances. And what are those factors?
First, a disconnect between those who benefit from prevailing policies and practices and those who will pay the price and bear the burden if and when the bubble bursts. Second, a lack of adequate transparency and accountability in connection with the true financial risks that we face. Third, too much debt, not enough focus on cash flow, and an over-reliance on narrow and myopic credit ratings. Finally, a failure of responsible parties to act until a crisis was at the doorstep.
There is growing agreement that the greatest threat to our nation's future is our own fiscal irresponsibility. In fact, as I noted in 2007 and Joint Chiefs Chairman Admiral Mullin stated last year, our fiscal irresponsibility and resulting debt is a national security issue. After all, if you don't keep your economy strong for both today and tomorrow, America's standing in the world and standard of living at home will both suffer over time – and waiting for a crisis before we act could also undermine our domestic tranquility.
So where should Washington go from here?
First, Congress and the President should reach a compromise agreement on an appropriate level of spending cuts in 2012 while also providing for some additional properly designed and effectively implemented critical infrastructure investments. Second, they should agree to re-impose tough statutory budget controls that will force much tougher choices on both the spending and tax side of the ledger beginning no later than 2013. Third, they should authorize and fund a national citizen education and engagement effort to help prepare the American people for the needed actions and to facilitate elected officials taking them without losing their jobs. Fourth, they should create a credible and independent process that will provide for a baseline review of major federal organizational structures, operational practices, policies and programs in order to make a range a transformational recommendations that will make the federal government more future focused, results oriented, successful and sustainable.Spending levels certainly need to be cut. After all, the base levels of federal discretionary spending increased by over 30 percent between 2007 and 2010 during a time of low inflation. At the same time, all parties must be realistic regarding how much should be cut and how quickly it can be achieved. In my view, we should be targeting greater cuts than have been recently considered, but over a longer period of time: for example, real spending cuts of $125-$150 billion over several years. If we did so, the related savings would be significant and would compound over time.
As the National Fiscal Responsibility and Reform Commission, CAI, The No Labels political movement (of which I am a co-founder), and others have noted, everything must be on the table – and all political leaders need to be at the table – in order to put our nation on a more prudent and sustainable fiscal path. This includes a range of social insurance program reforms, defense and other spending cuts, and comprehensive tax reform that generates additional revenues, including both individual and corporate tax reform. We must keep in mind that the private sector is the engine of innovation, growth, and jobs. In addition, many businesses are taxed at the individual, rather than the corporate, level.
Realistically, it will take us a number of years to get back into fiscal shape. And while it would be great if we could do a "grand bargain" and enact a broad range of transformational reforms in one step, that just isn't realistic in today's world. Therefore, what is a reasonable order of battle to win the war for our fiscal future?
First and foremost we need to enact budget process reforms, re-impose the type of budget controls and engage in the fact-based citizen education and engagement effort referred to previously. The next order of battle items should be corporate tax reform and Social Security reform. Why corporate tax reform? Because it can help to improve our competitiveness, enhance economic growth and generate jobs.
And why Social Security reform? Because we have a chance to make this important social insurance program solvent, sustainable and secure for both current and future generations. We can also exceed the expectations of all generations and demonstrate to both the markets and the American people that Washington can act before a crisis forces it too.
The above efforts should be followed by broader tax reform and Medicare/Medicaid reforms. We will then need to rationalize our health care promises and focus more on reducing health care costs in another round of health care legislation. We must also begin a multi-year effort to re-baseline the federal government's organizations, operations, programs and policies to make them more future focused, results oriented, affordable and sustainable.
In summary, the truth is that the government has grown too big, promised too much and waited too long to restructure. Our fiscal clock is ticking and time is not working in our favor. The Moment of Truth is rapidly approaching. As it does, let us hope that our elected officials must keep the words of Theodore Roosevelt in mind: “In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” And "We the People" must do our part by insisting on action and by making the price of doing nothing greater than the price of doing something We must insist that our legislators offer specific solutions to defuse our ticking debt bomb in a manner that is economically sensible, socially equitable, culturally acceptable, and politically feasible We need to recognize that improving our fiscal health, just like our physical health, will require some short-term pain for greater long-term gain. The same is true for state and local governments.
We'll soon know whether Washington policymakers are up to the challenge and whether they will start focusing more of doing their job than keeping their job. They need to focus first on their country rather than their party. And yes, the President and Congressional leaders from both political parties need to be at the table and everything must be on the table in order to achieve sustainable success. Let's hope they make the right choice this time!
All of us who are involved with the Comeback America Initiative (CAI) will do our part. All that we ask is that you do yours. The future of our country, communities and families depends on it.
For more information about the Comeback America Initiative and No Labels, check out www.tcaii.org and www.nolabels.org.
Monday, April 11, 2011
Budget Symbols, Not Substance!
Today’s quote du jour comes courtesy of Don Boudreaux, author of the Cafe Hayek blog.
“Suppose that in a mere three years your family’s spending – spending, mind you, not income – jumps from $80,000 to $101,600. You’re now understandably worried about the debt you’re piling up as a result of this 27 percent hike in spending.“So mom and dad, with much drama and angst and finger-pointing about each other’s irresponsibility and insensitivity, stage marathon sessions of dinner-table talks to solve the problem. They finally agree to reduce the family’s annual spending from $101,600 to $100,584.“For this 1 percent cut in their spending, mom and dad congratulate each other. And to emphasize that this spending cut shows that they are responsible stewards of the family’s assets, they approvingly quote Sen. Harry Reid, who was party to similar negotiations that concluded last night on Capitol Hill – negotiations in which Congress agreed to cut 1 percent from a budget that rose 27 percent in just the past three years. Said Sen. Reid: ‘Both sides have had to make tough choices. But tough choices is what this job’s all about.’“What a joke.”Source: Don Boudreaux, Cafe Hayek, April 9, 2011.
Friday, April 8, 2011
Stocks, Crude Oil Barrel Obliviously Higher
This is going to bring on another recession if it continues into the summer. There's no reason to think it won't, either! This smells just like 2008 again, and not one lesson has been learned! But with a Fed that is back-stopping risk and encouraging bubble again, and a President that is sinking us into a quagmire of debt and even more "humanitarian" wars, its not hard to see where this is going to lead. It won't be pretty.
Crude oil -- $111.65 and counting
Stocks - amazing that Bernanke and Wall Street don't perceive the bubble
Thursday, March 24, 2011
America's Finances Rank Among World's Worst
The US ranks near the bottom of developed global economies in terms of financial stability and will stay there unless it addresses its burgeoning debt problems, a new study has found.
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In the Sovereign Fiscal Responsibility Index, the Comeback America Initiative ranked 34 countries according to their ability to meet their financial challenges, and the US finished 28th, said David Walker, head of the organization and former US comptroller general.
"We think it is important for the American people to understand where the United States is as compared to other countries with regard to fiscal responsibility and sustainability," Walker said in a CNBC interview. "Americans are used to rankings and they're used to ranking very high, but frankly in this area we rank very low."
While the news is bad, there is a bright side.
"Here's the good news: Some of the top countries had their own fiscal challenges, made reforms and now rank highly," Walker said. "If we adopt the recommendations of the National Fiscal Responsibility and Reform Commission or ones that have similar bottom-line impact, we move from 28 to 8."
As the US languishes near the bottom, these countries make up the top five: Australia, New Zealand, Estonia, Sweden, China and Luxembourg.
Tuesday, March 8, 2011
1/3 of Wages Are From Government
from CNBC:
Government payouts—including Social Security, Medicare and unemployment insurance—make up more than a third of total wages and salaries of the U.S. population, a record figure that will only increase if action isn’t taken before the majority of Baby Boomers enter retirement.
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Even as the economy has recovered, social welfare benefits make up 35 percent of wages and salaries this year, up from 21 percent in 2000 and 10 percent in 1960, according to TrimTabs Investment Research using Bureau of Economic Analysis data.
“The U.S. economy has become alarmingly dependent on government stimulus,” said Madeline Schnapp, director of Macroeconomic Research at TrimTabs, in a note to clients. “Consumption supported by wages and salaries is a much stronger foundation for economic growth than consumption based on social welfare benefits.”
The economist gives the country two stark choices. In order to get welfare back to its pre-recession ratio of 26 percent of pay, “either wages and salaries would have to increase $2.3 trillion, or 35 percent, to $8.8 trillion, or social welfare benefits would have to decline $500 billion, or 23 percent, to $1.7 trillion,” she said.
Last month, the Republican-led House of Representatives passed a $61 billion federal spending cut, but Senate Democratic leaders and the White House made it clear that had no chance of becoming law. Short-term resolutions passed have averted a government shutdown that could have occurred this month, as Vice President Biden leads negotiations with Republican leaders on some sort of long-term compromise.
“You’ve got to cut back government spending and the Republicans will run on this platform leading up to next year’s election,” said Joe Terranova, Chief Market Strategist for Virtus Investment Partners and a “Fast Money” trader.Terranova noted some sort of opt out for social security or even raising the retirement age.
But the country may not be ready for these tough choices, even though economists like Schnapp say something will have to be done to avoid a significant economic crisis. A Wall Street Journal/NBC News poll released last week showed that less than a quarter of Americans supported making cuts to Social Security or Medicare in order to reign in the mounting budget deficit.
Those poll numbers may be skewed by a demographic shift the likes of which the nation has never seen. Only this year has the first round of baby boomers begun collecting Medicare benefits—and here comes 78 million more.
Social welfare benefits have increased by $514 billion over the last two years, according to TrimTabs figures, in part because of measures implemented to fight the financial crisis. Government spending normally takes on a larger part of the spending pie during economic calamities but how can the country change this make-up with the root of the crisis (housing) still on shaky ground, benchmark interest rates already cut to zero, and a demographic shift that calls for an increase in subsidies?
Monday, February 14, 2011
Geithner Admits Interest Costs to Surge
from Bloomberg:
Barack Obama may lose the advantage of low borrowing costs as the U.S. Treasury Department says what it pays to service the national debt is poised to triple amid record budget deficits.
Interest expense will rise to 3.1 percent of gross domestic product by 2016, from 1.3 percent in 2010 with the government forecast to run cumulative deficits of more than $4 trillion through the end of 2015, according to page 23 of a 24-page presentation made to a 13-member committee of bond dealers and investors that meet quarterly with Treasury officials.
While some of the lowest borrowing costs on record have helped the economy recover from its worst financial crisis since the Great Depression, bond yields are now rising as growth resumes. Net interest expense will triple to an all-time high of $554 billion in 2015 from $185 billion in 2010, according to the Obama administration’s adjusted 2011 budget.
“It’s a slow train wreck coming and we all know it’s going to happen,” said Bret Barker, an interest-rate analyst at Los Angeles-based TCW Group Inc., which manages about $115 billion in assets. “It’s just a question of whether we want to deal with it. There are huge structural changes that have to go on with this economy.”
The amount of marketable U.S. government debt outstanding has risen to $8.96 trillion from $5.8 trillion at the end of 2008, according to the Treasury Department. Debt-service costs will climb to 82 percent of the $757 billion shortfall projected for 2016 from about 12 percent in last year’s deficit, according to the budget projections.
Budget Proposal
That compares with 69 percent for Portugal, whose bonds have plummeted on speculation it may need to be bailed out by the European Union and International Monetary Fund.Forecasts of higher interest expenses raises the pressure on Obama to plan for trimming the deficit. The President, who has called for a five-year freeze on discretionary spending other than national security, is scheduled to release his proposed fiscal 2012 budget today as his administration and Congress negotiate boosting the $14.3 trillion debt ceiling.
“If government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe,” Federal Reserve Chairman Ben S. Bernanke told the House Budget Committee Feb. 9. “Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living.”
Yield Forecasts
Treasuries lost 2.67 percent last quarter, even after reinvested interest, and are down 1.54 percent this year, Bank of America Merrill Lynch index data show. Yields rose last week to an average of 2.19 percent for all maturities from 2010’s low of 1.30 percent on Nov. 4.The yield on benchmark 10-year Treasury note will climb to 4.25 by the end of the second quarter of 2012, from 3.63 percent last week, according to the median estimate of 51 economists and strategists surveyed by Bloomberg News. The rate was 3.64 percent as of 2:08 p.m. today in Tokyo. The economy will grow 3.2 percent in 2011, the fastest pace since 2004, according to another poll.
“People are starting to come to the conclusion that you’ve got a self-sustaining recovery going on here,” said Thomas Girard who helps manage $133 billion in fixed income at New York Life Investment Management in New York. “When interest rates start to go back up because of the normal business cycle, debt service costs have the potential to just skyrocket. Every day that we don’t address this in a meaningful way it gets more and more dangerous.”
‘Kind of Disruption’
While yields on the benchmark 10-year note are up, they remain below the average of 4.14 percent over the past decade as Europe’s debt crisis bolsters investor demand for safer assets, Bank of America Merrill Lynch index data show.“The market is still giving the U.S. government the benefit of the doubt,” said Eric Pellicciaro, New York-based head of global rates investments at BlackRock Inc., which manages about $3.56 trillion in assets. “What we’re concerned with is whether the budget will only be corrected after the market has tested them. Will we need some kind of disruption within the bond market before they’ll actually do anything.”
Still, U.S. spending on debt service accounts for 1.7 percent of its GDP compared with 2.5 percent for Germany, 2.6 percent for the United Kingdom and a median of 1.2 percent for AAA rated sovereign issuers, according to a study by Standard & Poor’s published Dec. 24. Among AA rated nations, China’s ratio is 0.4 percent, while Japan’s is 2.9 percent, and for BBB rated countries, Mexico devotes 1.7 percent of its output to debt service and Brazil 5.2 percent, the report shows.
Auction Demand
Demand for Treasuries remains close to record levels at government debt auctions. Investors bid $3.04 for each dollar of bonds sold in the government’s $178 billion of auctions last month, the most since September, according to data compiled by Bloomberg. Indirect bidders, a group that includes foreign central banks, bought a record 71 percent, or $17 billion of the $24 billion in 10-year notes offered on Feb. 9.Foreign holdings of Treasuries have increased 18 percent to $4.35 trillion through November. China, the largest overseas holder, has increased its stake by 0.1 percent to $895.6 billion, and Japan, the second largest, boosted its by 14.6 percent to $877.2 billion.
‘Killing Itself’
“China cannot dump Treasuries without killing itself,” said Michael Cheah, who oversees $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. “They’re holding Treasuries as a means to an end,” said Cheah, who worked at the Singapore Monetary Authority from 1982 through 1999, and now teaches finance classes at New York University and at Chinese universities. “It’s part of what’s needed to promote exports.”At least some of the increase in interest expense is related to an effort by the Treasury to extend the average maturity of its debt when rates are relatively low by selling more long-term bonds, which have higher yields than short-term notes. The average life of the U.S. debt is 59 months, up from 49.4 months in March 2009. That was the lowest since 1984.
The U.S. produced four budget surpluses from 1998 through 2001, the first since 1969, as the expanding economy, declining rates and a boom in stock prices combined to swell tax receipts.
Tax cuts in 2001 and 2003, the strain of the Sept. 11 terror attacks, the cost of funding wars in Afghanistan and Iraq, the collapse in home prices and the subsequent recession and financial crisis has led to the three largest deficits in dollar terms on record, totaling $3.17 trillion the past three years.
‘Demonstrates Confidence’
The U.S. needs to manage its spending decisions “in a way that demonstrates confidence to investors so we can bring down our long-term fiscal deficits, because if we don’t do that, it’s going to hurt future growth,” Treasury Secretary Timothy F. Geithner said in Washington on Feb. 9.The Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Soros Fund Management LLC, expressed concern in the Feb. 1 report that the U.S. is exposing itself to the risk that demand erodes unless it cultivates more domestic demand.
“A more diversified debt holder base would prepare the Treasury for a potential decline in foreign participation,” the report said.
Foreign investors held 49.7 percent of the $8.75 trillion of public Treasury debt outstanding as of November, down from as high as 55.7 percent in April 2008 after the collapse of Bear Stearns Cos., according to Treasury data.
Potential Demand
The committee projects there may be $2.4 trillion in latent demand for Treasuries from banks, insurance companies and pension funds as well as individual investors. New securities with maturities as long as 100 years, as well as callable Treasuries or bonds whose principal is linked to the growth of the economy might entice potential lenders, the report said.“They are opening up a can of worms with the idea of all these other instruments,” said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “They should try to keep the Treasury issuance as simple as possible. The more issuance you have in particular issue, the more people will trade them -- whether it be domestic or foreign investors.”
White House Budget Director Jacob Lew said the Obama administration’s 2012 budget would save $1.1 trillion over the next 10 years by cutting programs to rein in a deficit that may reach a record $1.5 trillion this year.
“We have to start living within our means,” Lew said yesterday on CNN’s “State of the Union” program.
Still, about $4.5 trillion, or 63 percent of the $7.2 trillion in public Treasury coupon debt, needs to be refinanced by 2016. That gives the government a narrowing window as growing interest expense will curtail its ability to spend.
“There is roll-over risk,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 20 primary dealers that trade with the Fed. “It’s a vicious cycle.”
Saturday, January 29, 2011
Mauldin: We Must Begin "Thinking the Unthinkable"
The Recent GDP Numbers – A Real Statistical Recovery
Now, before we get into our panel discussion (and the meeting afterward), let me comment on the GDP number that came in yesterday. This is what Moody’s Analytics told us:“Real GDP grew 3.2% at an annualized pace in the fourth quarter of 2010. This was below the consensus estimate for 3.6% growth and was an improvement from the 2.6% pace in the third quarter. Private inventories were an enormous drag on growth, subtracting 3.7 percentage points; this bodes very well for the near-term outlook and means that current demand is very strong. Consumer spending, investment and trade were all positives for growth in the fourth quarter; government was a slight negative. The economy will see very strong growth in 2011 as the tax and spending deal passed in December stimulates demand and the labor market picks up, creating a self-sustaining expansion.”
This 3.2% followed a 1.7% in the second quarter and a 2.6% in the third quarter. The trend is your friend.
Well, maybe not so much. That inventory number seemed odd to me, and looking into it with Lacy Hunt, it turns out there is more than the headline number. For some of you, this is going to be a little like “inside baseball;” but the way they calculate the GDP number can have some odd effects every now and then. And this quarter the effect was way more than normal. This is going to be somewhat counterintuitive, but hang in there with me as I try to make it simple.
You remember our old friendly equation:
GDP = C + I + G + (Net Exports) or
Gross Domestic Product is the combination of domestic Consumption (both consumer and business) plus Investments plus Government Expenditure plus Net Exports (exports minus imports). This latter category has been negative for quite some time, as imports, especially oil, have been larger than exports.
Now to get Real GDP (actual GDP after inflation) you have to take away the effects of inflation/deflation. This is done by the use of a deflator built in for each category. But the deflator for exports/imports is a little tricky at times.
Moody’s correctly noted that “private inventories were an enormous drag on growth” and concluded that this was a good thing, in that they assumed that meant inventories went down and thus inventory rebuilding in future quarters will add to GDP growth. And that is where you have to look at the numbers, and there we find our anomaly. There really wasn’t that big a drop in inventories. It was in large part in the statistics, not in the warehouse.
Oil in the 4th quarter rose from roughly $81 to $89, or about 10%. On an annualized basis, this is 40%. Inventory investment is equal to the change in book value of the inventories, minus what is known as the IVA, or inventory valuation adjustment, which is used to correct for prices going up or down. Because the value of oil rose and thus cost more to acquire, the accounting requires that you reduce the value of the current inventories. Thus “real” imports fell at a 13% annual rate. Why? Because the deflator rose by 19%, largely because of the rise in the price of oil.
I know, I know, I just wrote that because the price of oil went up, the “real” value of imports went down, as well as inventories. Some of you are getting economic whiplash right about now.
If oil were to go back down this quarter by the same amount, that “growth” could be wiped out. There is no conspiracy here. It is just a statistical necessity, like hedonic measurements, and it is all very clear in the fine print; but when there are wide swings in oil prices over a quarter, and because our imports of oil are so large, you can get these odd accounting factoids. Which the gunslingers on TV (and elsewhere) miss in their urge to be the first to get out a bullish statement!
How much did it change things? Lacy thinks by anywhere from 0.5% to 1%. That means GDP is still a positive number, but there is not a “3” handle at the beginning of it. In the grand scheme of things, no big deal, as it will balance out over the coming quarters and years. But I just wanted to point out (once again) that you have to take some of the numbers we get from our government with a few grains of salt. That’s the key takeaway here. And they CERTAINLY should not be traded upon. (Anybody who trades on the employment numbers deserves what they get, which is usually a loss. But back to our story.)
Consumer Spending Rose? Where Was the Income?
The really surprising number you saw the talking heads on TV mention was the growth of consumer spending, at 4.4%. Is the US consumer back? After all, real final sales rose by 7.1%, a number not seen since 1984 and Ronald Reagan. But real income rose a paltry 1.7%. Where did the money that was spent come from? Savings dropped a rather large 0.5% for the quarter. That was part of it. And I can’t find the link, but there was an unusual drawdown of money market and investment accounts last quarter, somewhere around 1.5%, if I remember correctly. (David Walker remembered that article as well.) That would just about cover it. But that is not a good thing and is certainly not sustainable.Let’s see what good friend David Rosenberg (more on Rosie below) has to say about those numbers:
“Even with the Q4 bounce, real final sales have managed to eke out a barely more than 2% annual gain since the recession ended, whereas what is normal at this stage of the cycle is a trend much closer to 4%. Welcome to the new normal.
“There is no doubt that there will be rejoicing in Mudville because real GDP did manage to finally hit a new all-time high in Q4. The recession losses in output have been reversed (though what that means for the 7 million jobs that have to be recouped is another matter). But, before you uncork the champagne, just consider what it has taken just to get the economy back to where it was three years ago:
· The funds rate moved down from 4.5% to zero.
· The Fed’s balance sheet expanded by more than 1.5 trillion dollars.
· The printing of M2 money supply of around 1 trillion dollars (the illusion of prosperity).
· Expansion of federal government debt of 4.8 trillion dollars.
“All this heavy lifting just to take the economy back to where it was in the fourth quarter of 2007. As they rejoice in Mudville, the memory is conjured up of Billy Joel bellowing out those famous words ‘Is that all you get for your money?’”
“With that being said, the bulls have the upper hand as they have since late August. At this point, the best advice we can give is to remind everyone that we entered 2010 with a 5% real GDP print in our hands. Back then, the most dangerous thing anyone could have done was extrapolate that performance through the winter, spring and summer months, when air pockets in the economic data surfaced, as Fed and federal government stimulus faded, and the equity market rode a wild roller coaster ride until Ben reclaimed his helicopter license.”
A Bubble in Complacency
Thursday put me in an introspective mood. It was the annual Tiger 21 conference, and the room held about 150 or so very-high-net-worth participants. The lunch session was Greta van Sustern interviewing Newt Gingrich. And yes, from what I heard he is going to run. I am glad about that, because he will raise the intellectual heft of the debate. I am nothing if not a political realist, having been involved in a lot of campaigns. I know the issues surrounding Newt. But far more important is that we have an honest national conversation that is a few notches above what we got in 2008. We so need more than sound bites and posturing. We need actual plans. There are several people I hope will run on the GOP side, as I think they bring something to the discussion. I will interject a few comments from Newt below.As noted above, I did not have any real idea where we were going with the panel. Clearly, Leader Gephardt was a pro-union, card-carrying Democrat, but he was very obviously concerned about the direction of the country and is very up on the issues. You don’t run for president twice without having some personal “mojo.” (And for the record, let me say that I really liked him. We three got together in the bar with some good wine after our presentation, waiting for the cars to take us to the airport, we and really got along. How in hell did Kerry beat him?) David Walker has been running around the country for three years telling people that we are on an unsustainable path. I have a book coming out in a month talking about the next and coming crisis (some of which has been the subject matter of this letter).
There was surprising agreement among us (surprising to me, at least). The gist of it is this (and if you have been paying attention this is no surprise):
We (the US) are on an unsustainable path. As Walker noted, cutting the budget (spending) by a few hundred billion dollars does not get us to sustainability. Going back to the 2007 budget level would be helpful but not sufficient.
Did you see the CBO (the more or less independent Congressional Budget Office) estimates of the deficit that came out this week? The CBO said the fiscal 2011 deficit will hit $1.48 trillion, up from last August's $1.07 trillion estimate. Other estimates, not forced to use unrealistic assumptions, are much higher.
And the real world? It is a whole lot uglier. From my friend Bill King at The King Report:
“The following tables from the US Treasury for January 21, 2011 (Friday) and January 22, 2010 (Saturday) show the public debt of the US Treasury has increased from $17.422 trillion to $20.713 trillion, a surge of almost $3.3 trillion in one year. So, the official budget deficit doesn’t tell the real US debt story. Please note that the current US ‘Public Debt Issues’ is 44.75% higher than the $14.3 trillion debt limit because it includes bailouts, Fannie Mae, Freddie Mac, student loans and other off-balance sheet funding.
The simple answer is that no possible resolution of the fiscal deficit that gets us to sustainability (which logic defines as below-nominal GDP, although surpluses would be nice) can be done without real cuts to Medicare entitlements or increased taxes or some combination.
Yes, there is a lot of waste in the medical system. Gingrich pointed out that American Express has about 0.3% fraud and Medicare had 13%. That is a hundred billion or so. American Express runs a real-time system and Medicare is still on paper. He listed other things that can be done. But back to our plot line of controlling the fiscal deficit.
We located the problem. There is about 30% of the electorate that is mad at Obama and the Democrats for not getting a single-payer, full health-care program. They want nothing less than that.
Then there is the 30% or so that are mad about increased taxes, runaway spending, and budget deficits. They will likely punish any Republican who even utters the word “increase” in the same sentence with taxes, unless they are talking about those bad tax-and-spend Democrats.
Right now, neither side seems willing to compromise. Obama has punted on coming up with any real solutions. Offering to freeze spending at today’s level is a joke. It is like one of my kids (and this has happened, kind of) getting my credit card, spending a ridiculous amount of money, and then saying, “Ok, Dad, if you’ll give me the card again I promise I won’t spend more than that!”
But the GOP is saying they want to cut spending around the edges of the budget without dealing with the real elephants in the room, Social Security and Medicare. They have some plans that get us closer, but none that David or I could see that gets us there.
What happens if someone talks about real adjustments to the entitlement programs, or tax increases? Look at what happened to the Deficit Commission and their reports. They were dead on arrival. I thought they had some interesting ideas.
It is hard to get to a real compromise with that level of conversation. But what the three of us on the panel did agree on is that if a compromise is not reached, the end result looks like Greece.
My points were that much of Europe is getting ready to give us a real crisis, sooner rather than later. Great Britain is headed for what looks like a recession and further problems. Japan, as I am wont to say, is a bug in search of a windshield. We are going to get some great real-time lessons on what happens when you don’t deal with a problem in time. The longer you wait, the worse the results will be when you are forced to deal with the issues.
The lack of compromise is going to run head on into a bond market that will force one, or raise rates until there is truly a crisis of biblical proportions. If you think high rates were bad in the ’70s (and they were, trust me!), think what they would be like in a deflationary environment.
For that is what would happen. We would fall into a severe recession, and recessions are by definition deflationary. And depending on how late we are in getting our act together, it could be worse than a recession. We could drag the whole world down.
Leader Gephardt spoke to the fact that it will take politicians essentially violating what they feel are their core views, for the good (and survival) of the nation. He thinks that there are enough leaders who get it now that a compromise is possible, although he noted that Obama is going to have to back off on some of his main issues. Newt said flat out that he did not think a compromise was possible, as he did not think Obama would reverse. Let’s call Walker a skeptical optimist. Me, I think it is 2013 before we get the real changes. I just see a bubble in complacency. The market is going up, so all must be right with the world.
If we don’t get those real changes, we will need to start thinking the unthinkable.
Can we last until 2013? Most likely, as we are going to see some cosmetic changes and that should encourage the bond market. But as our leaders watch the problems of the rest of the developed world increase then, depending on what they do, they could cut us a much shorter leash. We are approaching the Endgame. I worry that we could go much beyond that point without serious volatility and market upheaval.
And that is why the GOP primary is so important. There is not going to be much of a debate, if any, in the Democratic primary. Obama will coast to the nomination. All the real debate will be on the Republican side. And that is why we need “idea leaders” to step forward. Philosophy is all well and good, but we are getting ready to encounter a potentially very difficult bond market. There is hope that we can avoid the real hitting of the wall that I think is going to be Japan’s fate, but it will take some real solutions to problems, not just words. I want to see budgets. What do you cut? Do you raise taxes? Can we take this opportunity (let no crisis go to waste!) to actually reform the tax code? Maybe move to more of a consumption-based tax? Tax less of the things we need and want (like jobs, exports, and savings!) and more of the things we have less need of? Just a thought. Can we get a thought leader on the debate platform to offer a real restructuring? And make a solid case for it? Actually get the American people to focus on the crisis that is coming if we don’t act? (Not to mention those pesky wars, energy policy, the environment, etc. etc.)
Is there a compromise out there? Should there be one? That is the conversation we will have to have.
This national conversation will be the most important in my lifetime (I don’t say that lightly). Not just because of whom we elect, but because the bond market vigilantes will be paying attention to what we are saying. If they see the same old rhetoric, we will be in for a very bumpy ride.
Tuesday, January 11, 2011
Without Entitlement Cuts, Fiscally Sound Government Is Impossible
from No Money, No Worries blog:
The following chart should dispel the commonly held notion that we will be able to balance the federal budget by eliminating programs widely perceived as wasteful – the expenditures devoted to studying the mating habits of jellyfish and the like.
The above chart is a back-of-the-envelope calculation based on numbers published by the Congressional Budget Office. The sad truth is that according to current projections, we could eliminate ALL federal non-defense discretionary spending and still run a deficit.
The elephant in the room is entitlements – especially the fast growing Medicare and Medicaid programs.
Unfortunately, there is no sign that the public is ready to accept mathematical reality, despite all of the heated rhetoric, both at the federal and state levels.
- In a poll last year, Texans’ told Texas’ five largest newspapers that they would like to see budget cuts instead of tax increases. The newspapers put another poll in the field to see which programs Texans would support cutting to balance the budget. They overwhelmingly said that public education and health services should be spared. The problem? Those two programs consume a vast majority of the budget.
RG Ratcliffe and Peggy Fikac report on the conundrum offered up by public opinion to lawmakers. (Chronicle, Express-News)
Thursday, July 8, 2010
IMF Tells USA to Begin Austerity
WASHINGTON (AFP) – The International Monetary Fund on Thursday urged the United States to rein in its ballooning budget deficit without putting the "modest" economic recovery at risk.
"The central challenge is to develop a credible fiscal strategy to ensure that public debt is put -- and is seen to be put -- on a sustainable path without putting the recovery in jeopardy," the IMF said in a report.
Amid jitters that high levels of unemployment may force a double dip recession, the IMF warned the slow recovery would continue.
"While still modest by historical standards, the recovery has proved stronger than we had earlier expected.
"The outlook has improved in tandem with the recovery, but remaining household and financial balance sheet weaknesses -- along with elevated unemployment -- are likely to continue to restrain private spending."
The Washington-based lender said that despite the continued economic woes, the United States should move to put its budget in order.
President Barack Obama has plowed nearly a trillion dollars into the economy to spur economic growth, exploding the US deficit.
The IMF praised US efforts to cut the long-term deficit through health system reform, but said more needed to be done.
"The authorities' commitment to halve the budget deficit by 2013, and intention to stabilize public debt at just over 70 percent of GDP by 2015 are welcome, although much remains to be done to achieve these aims."
At a recent summit of the Group of 20 leading economies in Toronto, the Obama vowed to halve the deficit within three years.
But the IMF projects that the deficit will stand at 64 percent of gross domestic product this year, rising to just over 96 percent by 2020.
Saturday, May 15, 2010
IMF: USA Faces One of World's Worst Fiscal Disasters
I see no political will to accomplish what it will take to save ourselves.
--------------------
from Edmund Conway at the UK's Telegraph:
Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem -“even the United States, the world’s largest economy, has a very large fiscal deficit” were his words. They were rather vague, but by happy coincidence the International Monetary Fund has chosen to flesh out the issue today. Unfortunately this is a rather long post with a few chunky tables, but it is worth spending a bit of time with – the IMF analysis is fascinating.
Its cross-country Fiscal Monitor is not easy reading and is a VERY big pdf (17mb), so I’ve collected a few of the key points. The idea behind the document is to set out how much different countries around the world need to cut their deficits by in the next few years, and the bottom line is it’s going to be big and hard (ie 8.7pc of GDP in deficit cuts around the world, which works out at, gulp, about $4 trillion).
But the really interesting stuff is the detail, and what leaps out again and again is how much of a hill the US has to climb. Exhibit a is the fact that under the Obama administration’s current fiscal plans, the national debt in the US (on a gross basis) will climb to above 100pc of GDP by 2015 – a far steeper increase than almost any other country.
Compare it with the UK, which is often pinpointed as a Greece in the making. As you can see, gross debt increases sharply, but not by anything like the same degree.
Another issue is that, according to the IMF, the cost of extra healthcare and pensions will increase by a further 5.8pc over the next 20 years. This is the biggest increase of any other country in the G20 apart from Russia, and comes despite America having far more favourable demographics. It is significantly more than the UK’s 4.2pc.
But level of debt isn’t the only problem. Then there’s the fact that the US has a far shorter maturity of government debt than most other countries, meaning that even if it weren’t borrowing any extra cash it would have to issue a large chunk of new stuff each year as things are. The killer table to show you that is this one, which shows a country’s “gross financing needs” – in other words how much debt it has to issue in the coming years to keep itself functioning.
Britain, as you can see from the second column on the left, has one of the biggest deficits in the world. However, because it also has the longest maturity of average debt in the world (far right column), and so doesn’t have to issue as much new debt each year just to keep rolling that stuff over, its gross financing needs are – at 32.2pc of GDP, way bigger than Britain’s, at 20pc. Come to think of it, it’s actually worse than Greece on this measure.
What does this mean? Basically with a large financing need, you are particularly vulnerable if the market suddenly decides it doesn’t want your debt, since those extra interest rates they charge you mount much more quickly. Japan, by the way, is the one with a real problem on this front. It could hardly be any more vulnerable to a sudden drop in investor demand, and many over there fear that the moment domestic savers stop buying JGBs, the country is doomed to Greek-style collapse (though it doesn’t share Greece’s current account deficit and, crucially, has its own currency, so I don’t know about that).
On the flip side, unlike Japan or Britain, the US does not have a central bank with quite such a large stock of government debt. Both the Bank of England and Bank of Japan have done so much quantitative easing (buying bonds with printed money) over the past few years that they have the power to cause a fiscal shock if they decided they wanted to sell off their bonds at once. This table shows you that America, while not entirely guiltless on this front, has less of a shadow hanging over it.
But all of the above is what explains why the US, according to the IMF’s projections, has more to do than any other country in the developed world (apart from Japan) when it comes to bringing its debt back towards sustainable levels. Here’s the killer table. The column to look at is on the far right: note how the US needs a 12pc of GDP chunk chopped out of its structural deficit (ie adjusted for the economic cycle). That’s $1.7 trillion. Wow – that’s not far off Britain’s total annual economic output.
So does all of this mean the US is Greece? The answer, you might be surprised to hear, is no. Now, it is true that the US has some similar issues to Greece – the high debt, the need to roll over quite a lot of debt each year, the rising healthcare costs and so on. But it has two secret (or not so secret) weapons. The first is that unlike Greece it is not trapped in a monetary union. The US, like Britain and Japan, can independently control its monetary policy; it can devalue its currency. These are hardly solutions in and of themselves, but they do help make the adjustment a lot easier and more gradual. Second, the US has growth. It remains one of, if not the, world’s most dynamic economies. It is growing at a snappy pace this year (in comparison to other countries). And a few percentage points of GDP make an immense difference, since they make those debts much easier to repay.
Finally, some might be tempted at this point to cite the fact that the US has the world’s reserve currency in the dollar as another bonus. I am less sure. There is no doubt that this has made the US a safe haven destination (people buy US bonds when freaked out about more or less anything), and has meant that America has been able to keep borrowing at low levels throughout the crisis. However, the flip side of this is that because it has yet to feel the market strain, the US also has yet to face up properly to the public finance disaster that could befall it if it does not do anything about the problem. America is not Greece, but if it does not start making efforts to cut the deficit within a few years, it will head in that direction. The upshot wouldn’t be an IMF bail-out, but a collapse in the dollar and possible hyperinflation in the US, but it would be horrific all the same. America has time, but not forever.
--------------------
from Edmund Conway at the UK's Telegraph:
Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem -“even the United States, the world’s largest economy, has a very large fiscal deficit” were his words. They were rather vague, but by happy coincidence the International Monetary Fund has chosen to flesh out the issue today. Unfortunately this is a rather long post with a few chunky tables, but it is worth spending a bit of time with – the IMF analysis is fascinating.
Its cross-country Fiscal Monitor is not easy reading and is a VERY big pdf (17mb), so I’ve collected a few of the key points. The idea behind the document is to set out how much different countries around the world need to cut their deficits by in the next few years, and the bottom line is it’s going to be big and hard (ie 8.7pc of GDP in deficit cuts around the world, which works out at, gulp, about $4 trillion).
But the really interesting stuff is the detail, and what leaps out again and again is how much of a hill the US has to climb. Exhibit a is the fact that under the Obama administration’s current fiscal plans, the national debt in the US (on a gross basis) will climb to above 100pc of GDP by 2015 – a far steeper increase than almost any other country.
US gross debt as a percentage of GDP
UK gross debt as a percentage of GDP
But level of debt isn’t the only problem. Then there’s the fact that the US has a far shorter maturity of government debt than most other countries, meaning that even if it weren’t borrowing any extra cash it would have to issue a large chunk of new stuff each year as things are. The killer table to show you that is this one, which shows a country’s “gross financing needs” – in other words how much debt it has to issue in the coming years to keep itself functioning.
Click to enlarge
What does this mean? Basically with a large financing need, you are particularly vulnerable if the market suddenly decides it doesn’t want your debt, since those extra interest rates they charge you mount much more quickly. Japan, by the way, is the one with a real problem on this front. It could hardly be any more vulnerable to a sudden drop in investor demand, and many over there fear that the moment domestic savers stop buying JGBs, the country is doomed to Greek-style collapse (though it doesn’t share Greece’s current account deficit and, crucially, has its own currency, so I don’t know about that).
On the flip side, unlike Japan or Britain, the US does not have a central bank with quite such a large stock of government debt. Both the Bank of England and Bank of Japan have done so much quantitative easing (buying bonds with printed money) over the past few years that they have the power to cause a fiscal shock if they decided they wanted to sell off their bonds at once. This table shows you that America, while not entirely guiltless on this front, has less of a shadow hanging over it.
Click to enlarge
So does all of this mean the US is Greece? The answer, you might be surprised to hear, is no. Now, it is true that the US has some similar issues to Greece – the high debt, the need to roll over quite a lot of debt each year, the rising healthcare costs and so on. But it has two secret (or not so secret) weapons. The first is that unlike Greece it is not trapped in a monetary union. The US, like Britain and Japan, can independently control its monetary policy; it can devalue its currency. These are hardly solutions in and of themselves, but they do help make the adjustment a lot easier and more gradual. Second, the US has growth. It remains one of, if not the, world’s most dynamic economies. It is growing at a snappy pace this year (in comparison to other countries). And a few percentage points of GDP make an immense difference, since they make those debts much easier to repay.
Finally, some might be tempted at this point to cite the fact that the US has the world’s reserve currency in the dollar as another bonus. I am less sure. There is no doubt that this has made the US a safe haven destination (people buy US bonds when freaked out about more or less anything), and has meant that America has been able to keep borrowing at low levels throughout the crisis. However, the flip side of this is that because it has yet to feel the market strain, the US also has yet to face up properly to the public finance disaster that could befall it if it does not do anything about the problem. America is not Greece, but if it does not start making efforts to cut the deficit within a few years, it will head in that direction. The upshot wouldn’t be an IMF bail-out, but a collapse in the dollar and possible hyperinflation in the US, but it would be horrific all the same. America has time, but not forever.
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