Spain Halves Deficit With Painful Austerity Cuts:
http://www.thestreet.com/story/1084...?puc=outbrain&cm_ven=outbrain&obref=obnetwork
they still have a 20% jobless rate
So why is Spain surviving, and Greece still on the verge of imploding?
Yes, austerity is deflationary. So eventually, austerity forces default. Before that point happens, the bond vigilantes will force something to happen as cds spreads skyrocket on greece debt. And yes, they had no recourse. As the crisis gets more and more dire, we will have fewer and fewer options.
Except we control our own currency. If the Fed buys UST, I'm really not too concerned as long as inflation remains manageable. The US is not revenue constrained like Greece. The function of the treasury and the IRS in this country is simply to add and remove money to control its supply. When we have nearly deflationary conditions and low capacity utilization, I have a hard time getting worked up about deficits.
Just because we can print money does not mean we can print an unlimited amount of money. As for being able to cut off the rain before it begins to flood, well, Greenspan and Bernanke don't exactly have a good record.
A few weeks ago, Hedgeye, the investment research firm where I'm a managing director, hosted a conference call for our subscribers that posed the question, "Should U.S. Government Debt Be Rated Junk Status?" Given that debt issued by the U.S. government continues to trade at almost all-time lows in yield, this is a contrarian call to say the least.
But while investors are willing to accept little in the way of return to own U.S. government debt and the U.S. has retained its AAA credit rating, the metrics by which we use to evaluate the balance sheet of the United States continue to deteriorate.
Typically, a bond receives junk status due to its increased risk of default, and therefore pays higher yields to the owners of the bonds to make up for the risk. In general, the owner of a bond is subject to many risks: interest rate risk, inflationary risks, currency risk, duration risk, and so forth. In this instance, as it relates to the United States, we are actually most concerned with the risk related to future repayment. Specifically, with projected deficits for at least the next fifty years, will the United States be able to repay its debt and, if so, on what terms?
The most newsworthy nation to currently be rated junk status is Greece. The 5-year credit default swaps for Greece, which reflect the amount an investor is willing to pay for insurance against a potential default, are currently trading at 916 basis points(bps) which is substantially above the levels of the United States. In fact, credit default swaps for the American government 5-year bonds are trading at 49bps which reflect the AAA bond rating status of the United States.
In contrast to the price of both yields and credit default swaps, the key ratios from which we use to analyze a nation appear very similar between the United States and Greece, despite their divergent credit ratings. Specifically, the key ratios are: debt as percentage of GDP, deficit as a percentage of GDP, and debt as a percentage of revenue. We've outlined a comparative analysis between a typical junk-rated sovereign issues, in this case Greece, and the United States.
The key ratios: Greece vs. United States
Deficit as % of GDP
* US: 10.4%
* Greece: 13.6%
Debt as % of GDP
* US: 86.5% (including GSE debt: 121.6%)
* Greece: 115.1%
Debt as % of revenue
* US: 358.1%
* Greece: 312.2%
On two of the ratios, the United States appears to do better than Greece, which is certainly a positive, but if we include the debt of government sponsored entities, or GSEs, the United States actually has a worse ratio than Greece.
It is also important though to consider the future when contemplating the pricing and rating of a nation's debt. Specifically, is it expected that the nation will be running future deficits, which require incremental debt funding? If so, our policymakers may have to implement policies designed to narrow this funding gap, typically known as austerity measures.
And the outlook of the United States is distressed to say the least. The Congressional Budget Office projects the U.S. budget out until 2035 under two scenarios. In both scenarios, the U.S. government will run a deficit through the projection period and require increased debt to fund the deficit. In the more aggressive scenario, in terms of larger deficits, debt as percentage of GDP nears 200% by the end of the projection period. Hedgeye actually believes that even the more aggressive scenario could understate future deficits.
Why it could be worse than the CBO thinks
The year-to-date budget numbers that we recently released for July highlight the primary driver of this deficit: spending. The July results from the U.S. Treasury Department indicate that the United States has been running a deficit for 22 straight months. When normalizing for TARP, which we consider a 1-time expenditure, spending for the first 10 months of the government's fiscal year is up an astonishing 10.4%.
Despite this, the U.S. government has not taken any aggressive austerity measures to attempt to narrow the current and projected deficits. In contrast, most European nations have taken aggressive actions on both the revenue -- increasing taxes -- and cost sides -- reducing government expenditures -- to get their fiscal houses in order.
For example in Greece the government is implementing a reduction in public spending of $30 billion euros, an increase in the age when pensions are distributed from 60 to 65, an increase in the VAT tax from 21% to 23%, and a stated deficit reduction target.
The result of the actions in Europe are that, in theory, future deficits should shrink and debt balances eventually decline. In contrast, under our current course, U.S. deficits will expand for decades.
So, should U.S. government debt be downgraded to junk status? If we simply look at the ratios and the future outlook, the answer is quite obvious.
If the progressives get their targeted 4% inflation we will see that happen much much sooner. Years not decades.
Including GSE debt is retarded. The government guarantee would only come into play on principal lost. Thus, including 100% of GSE debt is assuming that 100% of home loans default and you can only sell the home for $0.
That's simply moronic.
Debt/revenue is also moronic, as taxes in the US are, overall, lower. Furthermore, the economic foundation is far more solid in the US. While the US may not be the large manufacturing employer it once was, it still has a huge manufacturing base, as well as IP. Greece has what? Shipping? Tourism? That's it. It has marginal natural resources, marginal space, marginal real industry, and almost no R&D or IP to speak of.
This is why the US has maintained AAA ratings.
Why would the inflation cause a debt implosion? The opposite is true.
Not your quote, left it in to add contextAnd all those houses that are under water are going to have their values rise relative to fixed rate debt levels.
Excellent post, Darwin, and well reasoned.
Thank you.
My question is, how do people like Krugman miss this? The math is simple and all of the data is readily available. I don't know his true intentions so I won't say that he is intentionally lying or misleading but how in the hell does he miss ALL of those points?
The flaw in your argument is the presumption that the US gov't, when faced with sudden inflation, would sell treasuries at ever increasing interest rates (and thereby promising further inflation). I would think that a government, such as our's, concerned about inflation would simply pay all existing debt, although this would eliminate T-Bills as an investment vehicle of last resort.
Dollars.
Where will these dollars come from? The govt is already trillions of $ in debt.
Are you asking me how the institution that creates dollars is going to find dollars?
He's asking a rhetorical question.
We all know the fed will just print up more cash and deflate our currency.
The flaw in your argument is the presumption that the US gov't, when faced with sudden inflation, would sell treasuries at ever increasing interest rates (and thereby promising further inflation). I would think that a government, such as our's, concerned about inflation would simply pay all existing debt, although this would eliminate T-Bills as an investment vehicle of last resort.
I don't know why that would be so inflationary. T-bills are readily convertible into cash presently as the secondary market is very liquid. It's not like the market can't take into account all cash and outstanding notes in the market (in other words, I can easily liquidate my T-bills) yet inflation remains close to 1%.
Also, stopping the sale of debt and instead just printing cash might make China work a little harder to fix their currency.
Dollars.
Are you serious?
First of all, we are not talking about being "faced with sudden inflation", we are talking about intentionally causing that inflation with a targeted rate. Secondly, while debt and cash spend the same, they are not the same. If you don't understand that concept then this debate is pointless.
If what you said was even remotely feasible we wouldn't have sold the bonds in the first place, since they are as you argue essentially cash. We would have just printed the damn cash in the first place and not be burdened with the interest payments.
YOU can readily liquidate your T-bills but can everyone at the same time?
What happens if every ounce of gold in the world is put up for sale at the same time? Do you honestly think its value will hold?
A T-bill is not cash, although it can be sold in secondary markets for cash that doesn't make it the same thing, it is an obligation to pay principle plus interest at a future date. That is called debt.
You don't really understand how the economy works, do you?