Best of the Week
Most Popular
1.UK General Election 2015 - Forecasting Seats for SNP, LIb-Dems, UKIP and Others - Nadeem_Walayat
2.UK General Election 2015 Seats Forecast - Who Will Win? - - Nadeem_Walayat
3.Gold Price Downtrend Looks Set to Continue - Clive_Maund
4.Commodity Prices Set To Plunge Below 2008 Lows - Austin_Galt
5.New Greece Drachma Revealed Amid Bank Runs - Greeks Buy Gold Sovereigns - GoldCore
6.Gold and Silver Stocks or General Stock Market Indices? - Rambus_Chartology
7.“Forgive Us Our Debts” – Only Way To Prevent Economic Meltdown - GoldCore
8.UK House Prices Trend 2015 and the May General Election - Nadeem_Walayat
9.12 Reasons Why Barry Ritholtz and Many UK Experts Are Mistaken On Gold - GoldCore
10.Recession is On The Way; Beat The Stock Market Crowd, Panic Now! - Mike_Shedlock
Last 5 days
What Top Hedge Fund Managers Really Think About Gold - 4th Mar 15
U.S. Dollar Strategic Backfire On U.S. Government Policy - 4th Mar 15
Canada’s Central Banks Orders End to ‘Spocking’ Of Canadian Dollar - Defacing Debasing Currencies - 4th Mar 15
Chicago's Only Possible Salvation: A Detroit-Like Bankruptcy - 4th Mar 15
Gold Price and Mining Stocks Decline Together - 3rd Mar 15
Financial Slaughter - The Silence of the Lambs - 3rd Mar 15
Bondholders “Bailed In” In Austria – New Banking Crisis? - 3rd Mar 15
How to Profit from the Coming Oil Price Crunch - 3rd Mar 15
Is Japan Zimbabwe? Could Japan go Hyperinflation? - 3rd Mar 15
Bill Gross Says Fed May Raise Rates 25 Basis Points in June - 3rd Mar 15
The Secret Behind My Hedge Fund Trade on U.S. Housing Market - 3rd Mar 15
BLS CPI Lie - How's That Dsflation Working Out for You? - 3rd Mar 15
Tesla Bonfire of the Money Printers’ Vanities - 3rd Mar 15
Gold Demand in UK, Europe and U.S. – Reuters Interview GoldCore - 2nd Mar 15
Watch the Skies... for Investor Profits - 2nd Mar 15
How Investors Can Identify the Best Small-Cap Stocks - 2nd Mar 15
Gold and Silver - What If the Precious Metal Stocks Bulls are Back - 2nd Mar 15
Students Getting a PhD in Subprime Debt - U.S. Debt Breaking Bad Part 3 - 2nd Mar 15
The Stock Market is in The Process of Major Top! - 2nd Mar 15
Stock Market Weakening Trend - 2nd Mar 15
Gold Price Glimmer of Hope - 1st Mar 15
Stock Markets Are Riding High on Thin Air - 1st Mar 15
Varoufakis vs. the Troika - Showdown in Athens - 1st Mar 15
Subprime Rising - U.S. Debt Breaking Bad Part 2 - 1st Mar 15
Gold CoT Improving, But ... - 1st Mar 15
UK General Election 2015 Seats Forecast - Who Will Win? - 28th Feb 15
UK General Election 2015 - Forecasting Seats for SNP, LIb-Dems, UKIP and Others - 28th Feb 15
Stocks Bull Market Continues - 28th Feb 15
U.S. Debt Breaking Bad - 28th Feb 15
NATO Frankenstein - When Centralization Scales Beyond Our Control - 28th Feb 15
Gold And Silver Insanity Prevails; Precious Metals Without Direction - 28th Feb 15
Fed Raising U.S. Interest Rates - Shovelin’ Schmitt Against the Tide - 28th Feb 15
Don't Let This Stock Market Myth Cost You Your Gains - 28th Feb 15
Recession is On The Way; Beat The Stock Market Crowd, Panic Now! - 28th Feb 15
Stock Market Indexes Creeping Towards the Edge - 28th Feb 15
GGD Going for Mexican Gold - 27th Feb 15
Foreign Real Estate Is the New Swiss Bank Account - 27th Feb 15
10 Reasons Washington Has War Fever - 27th Feb 15
Gold and the Euro Tragedy, Iraq 3.0, Ukraine Conflict Three Ring Circus - 27th Feb 15
Deepak Chopra - New Age Genius or Bullshit Expert? - Video - 27th Feb 15 - Videos
New Greece Drachma Revealed Amid Bank Runs - Greeks Buy Gold Sovereigns - 27th Feb 15
Will Month Long Stocks Rally Continue? - 27th Feb 15
The Only Public Hedge Fund You Should Own - 27th Feb 15
UK House Prices Trend 2015 and the May General Election - 27th Feb 15
Why America is Ungovernable - The Republicans’ Civil War - 27th Feb 15
Gold vs Gold Stocks: Bullish Anomaly Developing? - 27th Feb 15
I Heart Capitalism, Nasdaq Stocks, Then And Now - 27th Feb 15
The Fed’s History of Assassination - 27th Feb 15 i
Gold Bull Market Forecast - Money Will Rotate Into These Dead Investments - 27th Feb 15
"Audit the Fed"? We've Already Done That (Well, Kind of) - 26th Feb 15
Forget Peak Oil; Worry About Peak Demand - 26th Feb 15
Currency Wars, Again - 26th Feb 15
The Fed Waited Too Long: Here Comes Inflation - 26th Feb 15
Investing Inertia Won’t Keep Your Cash Safe - 26th Feb 15
The Net Neutrality Scam - 26th Feb 15
Will Conservatives Out of Control Immigration Crisis Boost UKIP Election 2015 Prospects? - 26th Feb 15
EU Warns Ireland and Euro Zone of Debt Dangers - 26th Feb 15
Commodity Prices Set To Plunge Below 2008 Lows - 26th Feb 15
Ukraine Hyperinflation as Currency Plunges 44% in One Week! - 26th Feb 15
The State of the Global Markets 2015 - 53 Page Report - 26th Feb 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The State of the Global Markets 2015

Sovereign Debt Crisis, America, PIIGS “R” Us too?

Interest-Rates / US Debt May 23, 2010 - 04:08 AM GMT

By: Michael_Pollaro

Interest-Rates

Diamond Rated - Best Financial Markets Analysis ArticleThe title of this essay may be a play on words but the facts are nothing of the sort.  Indeed, the facts suggest that the financial position of the U.S. government may not be all that much better than the financial position of the governments of Portugal, Italy, Ireland, Greece or Spain, the so-called PIIGS.  In fact, given the agenda the Obama administration has set for America, one so far distinguished by ever larger government spending programs being financed by ever larger amounts of debt, the U.S. government may be well on its way to becoming PIIGS “R” Us.


Sensationalism this is not.

Food for thought for holders of U.S. Treasury bonds?  You bet.

To see why, let’s start with a snapshot of the sovereign debt risk metrics of the U.S. government versus the PIIGS on fiscal year 2009 financials:

Sovereign Debt Risk Metrics

United States versus the PIIGS, Fiscal Year 2009

The PIIGS are looking at some huge financial imbalances, that much is for sure.  But I ask you, do the debt risk metrics of the U.S. government look that much different?  Is the debt of the U.S. government, as S&P’s triple-A credit rating suggests, that much more credit worthy than the debt of say Spain, Ireland or even Greece?

Let’s have a look at each risk metric, the way a sovereign debt investor might, ranking the countries on those metrics from “bad” to “worse.”

Economic Burden Metrics

The ability of a government to pay its bills ultimately comes down to the ability of its citizenry to produce income high enough to pay those bills.  On this score, America is not a country that many would want to emulate, showing Deficit to GDP and Debt to GDP ratios no better than the average PIIG:

Coverage Ratio Metrics

Financial analysts measure an entity’s ability to pay its obligations in several ways.  One popular way is through a metric known as a coverage ratio.  In this sovereign risk study, I offer up two coverage ratios:

Receipts to Outlays, measuring a government’s ability to fund its spending needs via current tax receipts, with a ratio of less than one meaning that that spending is being financed by deferring the costs of that spending into the future via the issuance of debt, and

Gross Debt to Receipts, representing the number of years it will take a government to repay its debt obligations at its current level of tax receipts, debt obligations incurred as result of years of opting to finance its spending the easy way – via debt issuance instead of via current tax receipts.

On both these risk metrics, the U.S. is at the bottom of the list by a “country” mile:

Size of Government

America has one big thing going for it – the size of its government relative to the size of its economy is, on a comparative basis, relatively small, taking  some 25% of the economy versus the roughly 50% taken by the PIIGS.  That implies that America’s ability to grow its income and pay its bills is better than that of the countries of the PIIGS.  Have a look at the numbers:

At first glance, and as a holder of U.S. Treasury bonds, perhaps this is reason for hope, and reason for that triple-A rating.  But a deeper dive into the particulars suggests something quite different.

Since 2000, the U.S. government’s spending bill has been growing at an annual rate of about 8%, more than double the rate seen in the 1990s, and a trend that has taken government spending from about 18% of GDP in 2000 to today’s 25%. Add $100 trillion plus and counting in unfunded-liabilities-come-spending into the mix, as well as a host of economically debilitating tax rate hikes beginning as soon as 2011, and you have the makings of an economy that will be increasingly burdened by the government, making it harder and harder for the government to pay it’s bills.  And may I say, all this without the U.S. Congress creating even one more government program.

Maybe not today’s problem, but looking forward, a bad omen for all holders of U.S. Treasury bonds, especially given the debt hole America has already dug for itself.

Debt Risk Metric Scorecard

Borrowing a tool used by baseball, let’s recap by constructing a Sovereign Debt Risk Scorecard.  Again, going from bad to worse, America on this metric is near the bottom of the list:

Granted, these are but a few summary metrics. Granted, the average risk metric so computed is a simple, unweighted arithmetic average.  But if these numbers don’t make you think, think that America’s triple-A status may be a bit too “generous,” then may I suggest you could be guilty of not thinking.  Not something I would recommend if you are, or plan to be an investor in U.S. government debt obligations.

IMF Looks Ahead and It Doesn’t Like What It Sees Either

In its April 20th 2010 Global Financial Stability Report, the International Monetary Fund (IMF) warned that government risk in the advanced economies is now the biggest threat to the world economy.  These governments, the IMF correctly observes, not only took on many of the bad debts incurred by private institutions these past several years, but due to the economic fallout of the crisis, and the existence of a plethora of government social nets, these governments face continuing heavy borrowing needs for at least the next few years.  An ugly situation for sure, and one the IMF said could get out of hand, and fast, if not addressed.

In conjunction with the release of the report, José Viñals, Financial Counselor and Director of the IMF’s Monetary and Capital Markets Department, said:

In spite of recent improvements in the outlook and the health of the global financial system, stability is not yet assured.… If the legacy of the present crisis and emerging sovereign risks are not addressed, we run the very real risk of undermining the recovery and extending the financial crisis into a new phase.

This author couldn’t have said it better.

Yet, in 2010, the U.S. Congress passed the largest government spending initiative in history in Obamacare.  Now, those same politicians are talking about cap and trade, not to mention even more stimulus programs.  This on top of those already horrible 2009 debt risk metrics.

Clearly, America is not addressing the seriousness of its financial state.

Indeed, the IMF put pen to paper, suggesting the very same thing about America.  This, taken from the IMF’s World Economic Outlook Database:

America, on the basis of these metrics says the IMF, is a nation going in the wrong direction.  With an estimated Deficit to GDP ratio of 10.97% in 2010, only Ireland is expected to show a ratio worse than the U.S.

America is NOT a PIIG?

Surely, you say, America is not a Greece, an Ireland or even a Spain.  And in a sense you would be correct.  Just not in the way you think.  For in one very important respect, America is potentially worse, a lot worse.

You see, America has the Federal Reserve’s printing press.  Steward of the world’s reserve currency, America issues debt in a currency it alone can print.  America can in no uncertain terms inflate its debt away, without limitation, with a few taps on a computer.

Portugal, Italy, Ireland, Greece and Spain, members of the Euro-zone are countries without a printing press.  They can’t bail themselves out by printing money to pay for their debts.  No, as we are witnessing in this, the latest financial crisis, they have to show at least some manner of fiscal austerity before they can get access to the printing press of the European Central Bank.

Can the same be said about America?

In essence, the Federal Reserve’s printing press is buying time for America.  It allows America to kick the debt-can down the road a bit longer, no holes barred, an option not available to the PIIGS.  The result, the appearance that America is in control, its finances manageable, nothing at all like the finances of the PIIGS.

The problem is that same printing press eventually makes matters worse, because it fosters even more irresponsibility on the part of politicians, allowing them to hand out economic goodies without thought, without ever having to ask a single voter to pay for them.  And as a result, the debt-can gets ever bigger, while the urge to inflate it away gets ever stronger.

Isn’t this exactly what we say happening in America, right now?

One day this debt-can, and perhaps by that time the mother of all cans, will have to be paid in full.  The only question will be whether that payment will be via fiscal austerity or via the debasement of the currency in which that can is priced.

One thing is for sure.  If you want to wreck a country’s economy, and its sovereign credit risk to boot, you do it with a printing press. And if it comes to this, you can be equally sure that U.S. Treasury bond investors will be all over it, because at that point it will be clear to all that the last investor out is going to be an investor holding a can with nothing in it but worthless pieces of paper.

Final Thoughts

Right now, U.S. Treasury bonds are in rally mode, as aghast over the crisis in Europe is chasing both hot and scared money into the U.S. Treasury market.  The reason, the U.S., home to the largest government fixed income market in the world and owner of the world’s reserve currency, is still viewed by many as the safe haven of choice.  At the very least, the best of the worst, on the the belief that America will not go down, at least not yet.

And you know what, as negative as this author is on America’s sovereign credit, that assessment is largely correct, for now.

In my book, and I think in the books of a growing number of U.S. Treasury bond investors the world over, it’s rent-a-bond not buy-a-bond when it comes to Americas sovereign debt.  Indeed, for the reasons discussed in this essay, and explored in depth in this series, America’s increasingly ugly sovereign risk metrics will not go unnoticed forever.  They can’t, for the path America is on is simply unsustainable.  If America does not heed the advice of the IMF, it may one day end up just like Greece.

U.S. Treasury bond holders will see to it.

A full accounting of the U.S. government’s financial condition, updated monthly courtesy of THE CONTRARIAN TAKE, can be found here.

By Michael Pollaro

Michael Pollaro writes a column called THE CONTRAIAN TAKE at True / Slant.com, its mission statement to present thoughts and ideas on important financial market and economic trends from the perspective of a free-market, Austrian economist.

Michael Pollaro is a retired Investment Banking professional, most recently Chief Operating Officer for the Bank's Cash Equity Trading Division. He is a passionate free market economist in the Austrian School tradition, a great admirer of the US founding fathers Thomas Jefferson and James Madison and a private investor.

Website: http://trueslant.com/michaelpollaro/ Email: jmpollaro@optonline.net

    Copyright © 2010 Michael Pollaro - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

gAnton
23 May 10, 11:59
Do Not Ask For Whom The Bell Toils

Possibly there are few other minor differences between the US and the other countries considered in this fine article. For example:

1. What percentage of the GNP is spent on military procurements and operating expenses? Do not those of the US greatly surpass the sum total military expenditures of all other countries together that are considered in the article?

2. The US has many, many off the book debts and obligations (Freddy, Fannie, and other GSEs and GSAs; social security and medicare shortfalls; state and local government debts; bank deposit insurance obligations, secret commitments of the Fed; etc.). Are the deficits of the other countries considered in the article so far below a realistic estimate of the total current debt as is that of the US?

3. The US has tremendous international economical and political power, a well oiled giant proaganda machine, etc. Does this have anything to do with its AAA credit rating?

4. The US has a host of outstanding current and near future severe problems (bank failures, a commercial real estate crisis, a continuing domestic real estate crisis, falling tax revenues, a greatly understated unemployment crisis, and, of course, a soverign government financial crisis). Do not these problems greatly exceed in financial terms those of the other countries in this study?


chris p
24 May 10, 19:45
gAnton good q but

america is a hollowed out giant....are fragile recovery is based on the stock market staying above 10,000.

the stock market collapsing is one of the bigger threats.....another trip down to 8000 and BOOM....it will shout (first by MSM double dip recession..(that will be there perception management)..but it is really a continuation of the depression process)..the consumer spending dependent economy will DRY up....and jobs will dissapear in a black hole of collapsing re-inforcing cycle....then the stimulus bills (fed printing) will go into over-drive......then ....the fed will also have to double down on monetizing (via circle jerk with the treasury) the deficit......and they could get away with this for awhile....but in the end....they would need to prop the stock market back up for the illusion of prosperity .....otherwise.....a lovely new world order is waiting it is on the other side of that can which is being kicked and it is a world full of draconian measures which try to maintain social order and the current power structure in the aftermath of a collapsing monetary system...all wrapped up in more global "political double talk" bodies of regulation and quasi governance.


geoduck
30 May 10, 16:14
United States Notes

We have an option not available to the Europeans. As things stand we borrow Federal Reserve Notes and they borrow Euro notes but for over 100 years and as recently as 1971 congress, through the treasury, spent United States Notes directly into circulation as legal tender. If it worked then it will work now.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014