PREPARE FOR THE AGE OF “FINANCIAL OPPRESSION”
There’s a colorful report going around this week out of Morgan Stanley that describes the global magnitude of the sovereign debt crisis and essentially concludes that haircuts are coming for bondholders. In other words, sovereign defaults are inevitable. They say this debt crisis is far from over:
“The sovereign debt crisis is not European: it is global. And it is not over. The European sovereign debt crisis of spring 2010 was a misnomer in more ways than one: there was not one crisis but two. And it will continue well beyond 2010, in our view. The first crisis was, and remains, an institutional crisis of the euro, caused by a flawed multilateral fiscal surveillance framework. Steps have been taken towards a correction of the flaws with a move from peer pressure to peer control of fiscal policy. This is reflected by the acceptance by the Greek, Spanish and Portuguese governments of fiscal measures largely dictated from Berlin and Brussels. The second crisis was, and remains, a sovereign debt crisis: a crisis caused by sovereign balance sheets being overstretched, to the point where insolvency ceases to be merely possible and becomes plausible. This crisis is not limited to the periphery of Europe. It is a global crisis and it is far from over. We take a high-level perspective on the state of government balance sheets and conclude that debt holders have to be prepared to enter an age of ‘financial oppression’.”
They expand on the argument by showing that debt/GDP can be misleading and that debt/revenue is a more accurate reflection of the current environments:
From this metric the United States is in far worse shape than any other country listed. The USA is even worse off than Greece. Unfortunately, there is no mention of monetary systems in the report and the analyst clearly ignores the fact that the EMU is a vastly different monetary system than that in the USA. I strongly disagree that the sovereign debt crisis is a global issue. It is primarily a European problem caused in large part by their flawed currency system. There is no default risk in the USA as I have explained before. What the United States suffers from is a massive private sector debt bubble that requires substantial de-leveraging. Where I agree with Morgan Stanley is that this crisis is far from over and that there should and will be haircuts (if only we’d allowed a few more haircuts here in the US banking system):
“It is not whether to default, but how, and vis-à-vis whom. What this means is that – as indicated above – governments will impose a loss on some of their stakeholders and have in fact started to do so (across Europe at least). The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take. “
Source: MS
I strongly disagree when you state that there is no risk of the US defaulting.
You are correct in saying that the US cannot be in a position where it MUST default.
But the US government can make a free choice to default. When interest payments exceed the defence budget, or are simply such a burden on government expenditures that other programs must be cut, then a default may be the optimal solution to America’s problems.
In fact, I would recommend a SELECTIVE default.
The US should default on all bonds owned by persons domociled in, or controlled by, states which fall below a certain threshold on Freedom House’s democracy index. This threshold should be set so that all debt held by China and Saudi Arabia and other opponents of The West is nullified, but that held by strategic partners is honored.
Although a default may be in America’s interest, it is extremely unlikely. But it is not impossible, or even implausible.
This sort of comment is just what makes me as exasperated with the left as the right. It is made with absolutely no knowledge of finance. The US cannot selectively default on debt; if it tried (which would be insane) the debtholders would simply change their addresses (or sell their debt). It is precisely because the US can’t selectively default that its debt is always acceptable.
there will be a problem w/that 358% number way down the road when private/corp debt has been reduced and money velocity increases.massive funding then with fresh TPC electrons will have a definite effect on their value.
but i agree,when you are up to your a++ in alligators,the first thing to do is drain the swamp.
Although a default may be in America’s interest…
Except that it isn’t. The US has some of the lowest borrowing costs in the world, precisely because it offers the risk free rate to investors throughout the globe. This has been the case since Alexander Hamilton was Treasury secretary, and it isn’t going to change, nor should it change, anytime soon.
Those low borrowing costs have been a curse rather than a blessing.
Borrowing costs have been too low for too long, which is the root cause of the overleveraging of America and the lack of productivity in the US economy.
This confidence discussion makes more sense–check it out
http://mercatus.org/sites/default/files/publication/Guessing%20the%20Trigger%20Point%20for%20a%20US%20Debt%20Crisis%208.24.10.pdf
I enjoyed the read, thanks for the recommendation, the author has a real resume!
You’ve always said there is no chance of US default given the country’s ability to print at will given its status as monopoly supplier of its own currency.
I don’t disagree with you here, though we both know if this thought were taken to its ultimate end point, pure monetization is in fact a technical default.
Either way, even if we don’t get to the point of pure monetization, as I understand it, and as I believe you have suggested and qualified your “no US default” beliefs with before, our inability to default is valid only to the extent that any currency we create is, in the end, backed up with the weight and merit of the US government’s ability to tax its productive economy/citizens.
In the context of this framework then, as I look at the revenue/gdp %s above, it seems as if the foundation to your “no US default” beliefs, is far less robust in the US than it nearly everywhere else, no (assuming revenue = tax revenue above)?
or you can look at column number #3 and see that the US has huge capacity to raise revenue. If the US did so, ie raising taxes as a % of GDP to French or German levels – bingo problem solved and then some. And please, many countries with higher tax rates are doing just fine (see Denmark with high taxes and social safety net but very flexible labor market, so this is not the road to perdition, as US GDP growth over the past 30 years has mirrored Europe with the kicker of demographics, and not been on some higher plane or something)This is the thing that doom and gloom guys forget the Us has a deficit because it chooses to due to political expediency. WE could raise taxes as a % of GDP by 6% to get to our long run average of 20-21%, we could introduce a VAT, we have so many levers that can be pulled that MS analysisi is farcical, even not mentioning monetary freedom. WE choose to underfund our government. Greece and Ireland have much less wiggle room, let alone that they are the size of a thimble.
> or you can look at column number #3 and see that the US has huge capacity to raise revenue. If the US did so, ie raising taxes as a % of GDP to French or German levels – bingo problem solved and then some.
Our taxes are already atr European levels, when you count everything on top of the federal tax – sales/local/ state/city taxes, property taxes, utility taxes, gas taxes, various registration fees, various insuarances ( which europeans don’t need such as health and life), payroll taxes and so on and so on. we are nicled and dimed each step of the way. In fact, US ability to raise taxes is very limited. But it can always simply print/issue money if it doesn’t ahve enough and impose inflation tax on everybody.
ES, Some of the adjustments you suggest for US taxes are reasonable, but for the purposes of this chart the full range of adjustments you list is undoubtedly not in the Eurozone revenue numbers either. More importantly in the US taxes fall more heavily on the middle & lower classes and the rich get off relatively lightly compared to most European jurisdictions. The days of funding our wars with tax cuts are going to end, one way or another, and inevitably with higher taxes for the rich.
Default will be when the ppp of the dollar declines faster than the yield surely?
Why would we default on what is effectively a savings account at the Fed? People view treasury notes as debt incorrectly. They fund nothing. The US govt could pay off its debts rather quickly if it wanted to. It would raise the tax rate through the ceiling and choke off all spending. The economy would shut off, but all these talking heads could then be comforted by the fact that we’re running a budget surplus.
This isn’t Europe. It’s a different monetary system. We require no foreign denominated debt to operate our economy. Sure, Congress could have a lapse in judgment and default, but that would just be plain stupid.
You have to think of the USA as an alchemist. He never runs out of money. Technical default is a possibility, but anyone still arguing in favor of inflation needs to pull their head out of the sand.
This is all dire predictions based on hopelessness that commands the thinker into a state of financial catharsis.
Anyone look at GDP recently? Or maybe the tax rates? Or the character of a nation to accept responsibility of it’s past and take corrective action and get to work?
Create an environment directing capital into capital projects IN AMERICA that result in future productivity IN AMERICA. Then every citizen and corporate entity needs to recognize that just and fair burdens are ahead of us and we must carry them or democracy is not ours to keep. We will pay higher taxes and a greater percentage of the tax burden must be born by those who have benefited the most in the past 30 years.
Bring GDP up and taxes in line with historical rates while spending on capital that increases American productivity at home. Then Debt/GDP will fall, Revenue/GDP will increase, Debt/Revenue will fall and all this crying like a bunch of spoiled baby boomers will cease!
MS were the smart guys who said 10yr yields were going up to 5.5% by year end. They have literally no idea what they are talking about.
European contagion. Oh how i’ve missed you. Say here’s a strange notion. What if the European countries collapse at the same time as the US housing market?
Here are some economic visuals:
Euro Zone Collapse:
http://www.hiddenlevers.com/hl/u?acgtl2
If one of the PIIGS does default on its debt, here’s what the economic fall-out should look like in the US.
US Home Prices vs US Pending Home Sales:
http://www.hiddenlevers.com/hl/u?aIpt15
Today’s home sales number doesn’t bode well for Home Prices. Get ready for another leg down… i mean below the double dip to create a new low kids.
Innovative site—-Hidden Levers
Don’t know about the data methodology on the relationships they present —but interesting
Defaulting on our debts? A scary thought indeed. Perhaps war-provoking.