Best of the Week
Most Popular
1. Best Cash ISA Savings Account for Soaring UK Inflation - February 2018 - Nadeem_Walayat
2.Gold Price Forecast 2018 - February Update - Nadeem_Walayat
3.Bitcoin Crypto Currencies Crash 2018, Are We Near the Bottom? - Nadeem_Walayat
4.Trump Bubble Bursts, Stock Market Panic Dow 1175 Point Crash Analysis - Nadeem_Walayat
5.Gold Corrects, Bitcoin Markets Crash, Whilst Stocks Plunge - Nadeem_Walayat
6.US Treasury Bonds: Fuse to Light the Bonfire - Jim_Willie_CB
7.Dow Falls 666 Points As Cryptocurrencies Crash And Krugman Emerges From His Van - Jeff_Berwick
8.Stock Market Roller Coaster Crash Ride Down to Dow Forecast 23,000 - Nadeem_Walayat
9.Trading the Shadows - Oil, Dollar, Stocks, Gold Trend Analysis - B.R. Hollister
10.Stock Market Analysis: Baying for Blood - Abalgorithm
Last 7 days
Why The Next Oil Boom Will Be Fueled By Blockchain - 23rd Feb 18
Gold Bull and Bear Markets - 23rd Feb 18
Why Recent Lows Are Crucial for US Dollar - 23rd Feb 18
Will Bitcoin be Larger Than NEO in 2018? - 23rd Feb 18
Stock Market SPX Probable Pop-n-drop - 22nd Feb 18
Stocks Fail to Hold Gains, But Still No Correction - 22nd Feb 18
Why We Should Buy Essay - 22nd Feb 18
The Latest US Debt Blow - 22nd Feb 18
6 Tips For Seamless Business Foreign Exchange - 22nd Feb 18
How to Anticipate Stock Market Trend Changes - 21st Feb 18
Gold Miners’ Rally? What Rally? Watch Out for More Fake Moves! - 21st Feb 18
5 Big Drivers of Higher Inflation Rates Ahead - 21st Feb 18
Goofy Indictments Divert Attention from Criminal Abuses at the FBI and DOJ - 21st Feb 18
Bitcoin or British Pound ‘Pretty Much Failed’ As Currency? - 21st Feb 18
Stock Market Waiting for the Fed - 21st Feb 18
National Identity Demands Restrictive Immigration - 21st Feb 18
Best Opportunities for Freelance Technical Writing Jobs - 21st Feb 18
4% US 10-year Treasury Note Yield Will Be a Floor Not a Ceiling - 20th Feb 18
Governments Are LYING about Their Gold Activities while Mining Companies Cower - 20th Feb 18
No Silver Lining Here - 20th Feb 18
Semi Conductor Stocks SEMI Bearish? - 20th Feb 18
The Prisoner Promised Land - 20th Feb 18
Best Car Dash Cam Review: Z-Edge S3 Dual Dash Cam - UNBOXING (1) - 20th Feb 18
How Inflation Reduces The Real Value Of Social Security Net Of Medicare Premiums - 19th Feb 18
Could Stellar Lumens be a Challenger to Bitcoin for International Payments? - 19th Feb 18
US-China Trade War Escalates As Further Measures Are Taken - 19th Feb 18
How To Trade Gold Stocks with Momentum - 19th Feb 18
Is a New Gold Bull Market on the Horizon? - 19th Feb 18
Stock Market Decision Point! - 19th Feb 18
An Inflation Indicator to Watch, Part 1 - 18th Feb 18
Get on Top Of Debt Before It Gets on Top of You - 18th Feb 18
Will the Stock Market Make a Double Bottom? - 18th Feb 18
5 Reasons Why Commodities Are the Investment Place to be in 2018 - 18th Feb 18
1 Week Later, Stock, Bond Market Risk Remains ‘On’ as 2 of 3 Amigos Ride On - 17th Feb 18
Crude Oil Prices: A Case of Dueling Narratives? - 17th Feb 18
Free 1000 Youtube Subscribers Services - YTpals, Subpals, SubmeNow Test - 17th Feb 18
How to Trade as We Near March Stock Market Top - 16th Feb 18
Bitcoin as Poison - 16th Feb 18
GDX Gold ETF Weathers Stock Market Selloff - 16th Feb 18
Casino Statistics and Demographics - 16th Feb 18
IS Today Thee Stock Market Turn Day? - 16th Feb 18
Huge SMIGGLE Shopping HAUL, Pencil Cases, Drinks Bottles, Back Packs, Toys.... - 16th Feb 18
Tesla Cash Keeps Burning at $320 a Share - 15th Feb 18
Big Conflict Ahead in the Financial Markets - 15th Feb 18
Stocks Extend Rally Off Friday's Low, But Short-Term Exhaustion Near - 15th Feb 18
Stock Market Out on a Limb... - 15th Feb 18
Things Only a True Friend Would Say About Gold - 14th Feb 18
Global Debt Crisis II Cometh - 14th Feb 18
Understanding Crude Oil Behavior - 14th Feb 18
Stock Market is Getting Scary... - 14th Feb 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

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.


© 2005-2018 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

6 Critical Money Making Rules