Posted on 03/26/2010 6:54:39 AM PDT by SeekAndFind
While the global economy is crawling out from the most severe recession and financial crisis of the postwar period, the euro zone debt crisis has significantly increased the chances of a double-dip recession in Europe and a global slowdown. Sovereign risk has recently graduated from being an emerging economy hitch to an advanced economy problem. The Greek debt crisis has occupied center stage of the economic and political debate. It is not just a Greek tragedy--the contagion could spread to Portugal, Spain, Italy and Ireland. Indeed, at stake is the entire euro zone framework. Yet fiscal sustainability and sovereign risk also loom over other advanced economies like Japan, the U.K. and the U.S.
A few years back we expressed concerns about the persistence of divergences in the euro zone and therefore its long-term success. We studied financial integration and channels of interstate risk-sharing and found that since the inception of the euro zone a higher degree of financial integration and cross-county ownership of financial and productive assets has contributed to improved risk-sharing in the currency area, though risk-sharing remains significantly lower than in the U.S. Going beyond the econometrics, this crisis highlights flaws in the design of the euro zone--in this case the lack of political, economic and fiscal federalism, and the absence of a mechanism like those which exist in both the U.S. and Japan to bail out troubled members.
Still, the comparison between U.S. states and troubled euro zone members is back in vogue. Projections show that in a matter of a couple of years, the U.S. gross federal debt will exceed GDP and the federal budget will never balance again. This is clearly unsustainable and raises questions about the future of the U.S.' AAA ratings.
(Excerpt) Read more at forbes.com ...
Their reasoning :
* The aggregate fiscal deficit of the U.S. states is estimated to be less than 2% of total U.S. GDP during 2008 to 2012,
* The aggregate debt of state and local governments is estimated to be less than 20% of GDP during 2008 to 2010—both far below those of several lagging euro zone countries.
* Even high deficit states— New York, Illinois, New Jersey and California (the NINCs)— in comparison with some vulnerable EU countries—Portugal, Italy, Ireland, Greece and Spain (the PIIGS) do not show immediate danger.
The fiscal deficit in the NINCs did not exceed 3% of GDP during 2008-09; most countries in the PIIGS had deficits larger than 6% of GDP.
* The debt-to-GDP ratios in the NINCs were below 15% during 2008 to 2009, while this ratio was well above 60% for most PIIGS.
* The difference is even more marked if we look at the interest payments-to-GDP ratio, which was below 1% for the NINCs but above 6% for most PIIGS. However, interest payments as a ratio of revenues were around 4%-7% in the NINCs and above 10% in Greece and Italy, indicating that high outstanding debt and interest rates pose debt servicing challenges to both the NINCs and the PIIGS as both face weak economic recovery prospects.
THEIR CONCLUSION :
Overall, there does not appear to be a Greece among the U.S. states in terms of fiscal and systemic risks.
Forgot to add the author’s credentials :
Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics (RGE), writes a weekly column for Forbes.
Christian Menegatti is vice president of RGE’s global economic research
Arpitha Bykere is a senior research analyst at RGE
So no small implosions, just a continual kicking of the can down the road until the really big one. I feel better.
Let’s put it this way — many people are saying that you might not see the US become a Greece in your lifetime. Your children are different though.
That's not an accurate statement of concerns. It's a straw man. Even though California is already issuing scrip, the overarching problem is the sovereign debt of the United States, and not one of the weak sisters.
How do you respond to their quoting a figure that says The aggregate fiscal deficit of the U.S. states is estimated to be less than a mere 2% of total U.S. GDP during 2008 to 2012 compared to several times that percentage in other sovereign countries ?
I don’t respond to it. It’s a head fake away from the federal debt that is the time bomb. Individual states by themselves in the short term are not the problem.
Let me expand a little bit, because the article’s clumsy language muddies what they are driving at.
Greece has had to be propped up by the rest of the Eurozone, because it is failing. What the authors are posing is the hypothetical of one of the 50 states (say, Iowa) being in the same boat, and the federal government having to rush to its rescue. It would be easier for the US federal government to do so because Iowa doesn’t (nor any of the other states) have a large debt burden.
Which is good, because the federal government itself isn’t that far - percentage-wise - behind Greece itself.
The authors are trying to reassure state government bond buyers that Greece-like default by an Iowa is a small risk. Fine. But that doesn’t address the larger problem of DC financial dysfunction.
What a pile of steaming crap. California, Michigan, New York, North Caroliina, Pension Funds, Social Security, Medicare, Medicaid ARE ALL GOING BROKE. China is no longer buying US Bonds and selling what they have. Same with Japan. OPEC countries will agree with China soon and depeg from the US$. These people are still in fairy tale land with their unicorns.
Helicopter Sugar Daddy Ben Bernanke keeps pumping out the monopoly money, but all the places to create new bubbles are gone. Gig is almost up.
My prediction:
1. The PIIGS fail.
2. European Union disentegrates.
3. Mass flight to commodities and US Treasury bonds.
4. US Debt reaches a level that can’t be ignored.
5. Two things can happen here:
a. US Treasury defaults on sovereign debt (right, like that will happen_
b. Treasury and Fed try to inflate their way out of debt creating hyperinflation.
Either way, we are screwed. I highly suggest people begin thinking about where to find food other than McDonalds and grocery stores.
There are lots of analysts saying that there’s going to be inflation, yet many others say there is no inflation.
I wanted to go over this again.
When the economy goes down, people save more. When that happens, circulating M2 (money) also goes down because less people are spending. That would make the economy even worse, so what the government does, is it borrows money from the Fed, which makes money out of absolutely nothing, and then lends it to the government at interest (and then pays back 95% of its profits to the government or so, over $50B last year. The other few billion? No one knows...).
This is all a shell game because the FED really is the Federal Government.
Then this new money sort of replaces the saved money, and the recession should hopefully not get worse.
Then, once things are better ( if they do), this new money which eventually floats around is deposited at banks. Banks then use this as high powered money to create more money from thin air. About 90%. So, you deposit, $10,000, the bank can lend $9000. This isn’t YOUR $9000, it’s brand new money. Your $10,000 is still there (and they used to like to gamble with it).
But it doesn’t end there. There is now $9000 of new money in the economy. That then gets deposited at another bank. Now that bank can lend $8100, and so on.
That’s why the bailout of $700B will eventually reach about $7T. (This will expand the money supply around 30% - 50%.) The money hasn’t been “unlocked” yet. So, once the economy picks up again, and it’s going to need employment for the money to be unlocked, we could see a lot of inflation. Maybe 10% a year. For a few years.
That’s the way I see it.
There are lots of analysts saying that there’s going to be inflation, yet many others say there is no inflation.
I wanted to go over this again.
When the economy goes down, people save more. When that happens, circulating M2 (money) also goes down because less people are spending. That would make the economy even worse, so what the government does, is it borrows money from the Fed, which makes money out of absolutely nothing, and then lends it to the government at interest (and then pays back 95% of its profits to the government or so, over $50B last year. The other few billion? No one knows...).
This is all a shell game because the FED really is the Federal Government.
Then this new money sort of replaces the saved money, and the recession should hopefully not get worse.
Then, once things are better ( if they do), this new money which eventually floats around is deposited at banks. Banks then use this as high powered money to create more money from thin air. About 90%. So, you deposit, $10,000, the bank can lend $9000. This isn’t YOUR $9000, it’s brand new money. Your $10,000 is still there (and they used to like to gamble with it).
But it doesn’t end there. There is now $9000 of new money in the economy. That then gets deposited at another bank. Now that bank can lend $8100, and so on.
That’s why the bailout of $700B will eventually reach about $7T. (This will expand the money supply around 30% - 50%.) The money hasn’t been “unlocked” yet. So, once the economy picks up again, and it’s going to need employment for the money to be unlocked, we could see a lot of inflation. Maybe 10% a year. For a few years.
That’s the way I see it.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.