Mosler: Greek Default Not Logical Path Out of Crisis
By Forrest Jones and Kathleen Walter
September 30 — Letting Greece default won’t end Europe’s crisis and won’t allow Germany and other core nations to brush themselves off and move merrily on their way, says Warren Mosler, principal and co-founder of AVM, an international bond firm with 30 years of experience in Europe and author of the 2010 book, “The 7 Deadly Innocent Frauds of Economic Policy.”
In fact, it will do the opposite. It will cost money and rattle key export markets for Germany and other countries targeting European periphery countries.
Greece has run up debts and may default and exit the euro, yet many in wealthier nations such as Germany oppose bailouts for Greece and other debt-ridden Mediterranean nations.
They also have opposed backing euro-wide bonds, which basically shores up the Greek economy via the financial backing of the Greece’s richer northern neighbors.
However, allowing the European Central Bank to play a role in Greece’s economic reform will not put the load on German, French and other taxpayers, Mosler says.
“It’s a question if a bailout now is good for Germany and France but not so good for Greece, because if Greece is allowed to default, then their debt goes away. They are agreeing to wipe out their debt and it reduces their payments,” he said in an exclusive Newsmax.TV interview.
“But if they fund Greece, and don’t allow them to default, then Greece has to continue to make these payments. So the whole dynamic has changed from doing Greece a favor to disciplining Greece by not allowing them to default.”
That makes default, arguably, less imminent.
“I would think the odds are shifting to the endgame where Greece doesn’t default, where at the end of the day Greece is forced though the austerity measures to run a primary balance or primary surplus, the interest payments will largely wind up with up with the European Central Bank, who is buying Greek debt in the marketplace,” Mosler says.
Furthermore, the logic that applies to keeping Greece in the eurozone applies to the other nations such as Italy.
“It used to be if Germany, France and the others bailed out Greece, and then suddenly they have to bail out Ireland, Portugal, Spain and Italy, they could never have the capacity to do that. It’s now understood that there is no limit, no nominal limit to the check that the European Central Bank can write,” Mosler says.
Plus, Europe can expect no side effects of such Central Bank involvement.
“It will not weaken the euro, it will not cause inflation and it will not increase total spending in the region. In fact it will help reduce total spending in the region because the European Central Bank imposes terms and conditions when it intervenes.”
Should Greece default, however, Europe would feel the pain, but it shouldn’t be too bad in the United States, Mosler says.
Yes, regulators would have to react.
“The FDIC would have to decide how they would want to respond to a drop in equity. Would they want the banks to raise more capital? Would they give them time to do it?”
But they wouldn’t have to react too much.
“They don’t need to shut the banks down, it doesn’t need to be disruptive to the real economy.”
Turning to the United States and President Barack Obama’s economic policies, Mosler says the president is on the right track by running deficits, but adds he’s doing a poor job of explaining the rationale behind his policies.
Or he just doesn’t understand it.
Category Archives: Italy
CH News – 09.13.11
Ok news so far for August, some slowing but no sign of a hard landing yet!
On Tue, Sep 13, 2011 at 8:03 AM, Evelyn Richards wrote:
HIGHLIGHTS
-China’s retail sales up 17% in Aug
-China’s fixed asset investment up 25% in Jan-Aug
-Yuan Forwards Decline Most in a Month on Greece Debt Concern
-China Aims to Play Role in Stabilizing Europe, Researcher Says
-China August Fiscal Revenue Rises 34.3% on Year, Ministry Says
-China Called on as Emergency Lender as Italy Faces Crisis
-China unlikely to loosen monetary policy
China’s retail sales up 17% in Aug
Sep. 13, 2011 (China Knowledge) – China’s retail sales reached RMB 1.47 trillion
in August this year, up 17% year-on-year, said the National Bureau of
Statistics.Total retail sales in urban areas rose 17.1% year-on-year to RMB 1.28 trillion
last month, while retail sales in rural areas rose 16.4% to RMB 192.2 billion in
the same period.Retail sales in the catering industry also grew and increased to 16.7%
year-on-year to RMB 171.7 billion in August, while retail sales of consumer
goods rose 17% to RMB 1.3 trillion.Last month, the retails sales of automobiles continued to top the country’s
retails sales list, reaching RMB 174.6 billion, up 12.4% year-on-year, while
retail sales of oil and related products came in second, hitting RMB 126.7
billion, with a growth of 38.4%.In the first eight months of this year, the country’s retail sales totaled RMB
11.49 trillion, 16.9% more than in the corresponding period of last year.
Retails sales of automobiles grew 14.9% to RMB 1.29 trillion during the period,
and retail sales of oil and related products amounted to RMB 928.2 billion,
39.5%.
China’s fixed asset investment up 25% in Jan-Aug
Sep. 13, 2011 (China Knowledge) – China’s total fixed asset investment surged
25% year on year to RMB 18.06 trillion in the first eight months of this year,
according to statistics released by the National Bureau of Statistics.The growth rate was 0.4 percentage points lower than that in the first seven
months.Last month, the country’s fixed asset investment climbed 1.16% from July.
Fixed asset investment in primary industry saw a 23% increase, hitting RMB 417.6
billion, while investment in secondary and investment in tertiary industry grew
27% and 23.6% year on year to RMB 7.92 trillion and RMB 9.73 trillion,
respectively, according to the latest statistics.The country’s investment in the industrial sector jumped 26.6% year-on-year to
RMB 7.71 trillion, including RMB 638.9 billion in the mining sector and RMB 6.24
trillion in the manufacturing, up 15.9% and 32.2% year on year, respectively.
The power, gas and water producing and supplying industry saw its fixed-asset
investment climb 1.9% year on year to RMB 833.5 billion in the first eight
months.In the first eight months, investment in real estate development surged up 33.2%
year on year to RMB 3.78 trillion.Meanwhile, fixed asset investment in China’s eastern, central and western areas
booked notable year-on year increases of 22.6%, 30.1% and 29.4%, respectively.
Yuan Forwards Decline Most in a Month on Greece Debt Concern
Sept. 13 (Bloomberg) — China’s yuan forwards dropped the
most in a month amid speculation Greece is nearing default,
which may prompt policy makers to slow the currency’s
appreciation.
The People’s Bank of China set the daily reference rate
0.09 percent lower today, the most in almost four weeks, as
Asian currencies weakened. The chance of a default by Greece in
the next five years has soared to 98 percent as Prime Minister
George Papandreou fails to reassure investors that his country
can survive the euro-region crisis, credit-default swaps showed.
“What you may see actually is a weaker pace of
appreciation,” said Leong Sook Mei, regional head of global
currency research at Bank of Tokyo Mitsubishi UFJ Ltd. in
Singapore. “There was lots of risk aversion with regards to the
Greece issue. The overall trend of appreciation won’t stop as
yet until we see decisive signs of Chinese growth coming off and
inflation easing.”
Twelve-month non-deliverable forwards slid 0.33 percent to
6.3305 per dollar as of 4:58 p.m. in Hong Kong, according to
data compiled by Bloomberg. The premium to the onshore spot rate
was 1.1 percent, compared with 1.2 percent yesterday.
The yuan dropped 0.17 percent to 6.3991 per dollar in
Shanghai, according to the China Foreign Exchange Trade System.
In Hong Kong’s offshore market, the yuan declined 0.02 percent
to 6.3855.
A central bank statement yesterday that inflation is still
too high is “hawkish,” Tim Condon, head of Asia research at
ING Groep NV, said in an e-mailed note today.
Policy makers will want to see a second consecutive month
of lower headline inflation before declaring “victory,” Condon
wrote. He reiterated the bank’s call for one more 25-basis point
increase in benchmark interest rates by the end of the year.
China’s inflation eased in August, rising 6.2 percent from
a year earlier, compared with 6.5 percent in July, which was the
fastest since June 2008.
China Aims to Play Role in Stabilizing Europe, Researcher Says
Sept. 13 (Bloomberg) — China is playing its role as a
responsible major world economy and is trying to help stabilize
global confidence by supporting European governments, Zhang
Yansheng, a researcher affiliated with the nation’s top economic
planning agency, said today.
Chinese policy makers are thinking in a “global context”
and about the need to prevent a “domino effect” in the debt
crisis, Zhang said in Beijing today when asked to comment on
reports that China is in talks to make investments in Italy that
may include government bonds. If Italy “falls” it may drag
down Europe, the world and China’s economy, he said.
There is a limit to what China can do to help, Zhang said.
Zhang, who is a researcher at the Institute of Foreign
Economic Research affiliated to the National Development and
Reform Commission, said he was giving his own views on the
matter.
China August Fiscal Revenue Rises 34.3% on Year, Ministry Says
Sept. 13 (Bloomberg) — China’s August fiscal revenue rose
34.3 percent from a year earlier to 754.6 billion yuan and
fiscal expenditure rose 25.9 percent to 807.7 billion yuan,
according to a statement on the Ministry of Finance’s website
today.
Fiscal revenue for the first eight months this year rose
30.9 percent to 7.4 trillion yuan, the statement said.
China Called on as Emergency Lender as Italy Faces Crisis
Sept. 13 (Bloomberg Businessweek) — China’s status as the fastest- growing major economy and holder of the largest foreign-exchange reserves lured another bailout candidate as Italy struggles to avoid a collapse in investor confidence.Italian officials held talks in the past few weeks with Chinese counterparts about potential investments in the country, an Italian government official said yesterday, adding that bonds weren’t the focus. Finance Minister Giulio Tremonti met with Chinese officials in Rome earlier this month, his spokesman Filippo Pepe said by phone today, declining to say exactly when the talks took place or what was discussed.
Foreign Ministry spokeswoman Jiang Yu, asked about buying Italian assets, said Europe is one of China’s main investment destinations, without specifically mentioning Italy.
Italy joins Spain, Greece, Portugal and investment bank Morgan Stanley among distressed borrowers that turned to China since the 2007 collapse in U.S. mortgage securities set off a crisis that widened to engulf euro-region sovereign debtors. Stocks rose on the potential Chinese investment in Italy even as previous commitments failed to have a lasting impact.
“It’s a clear pattern of China’s intention to help stabilize the euro area,” said Nicholas Zhu, head of macro- commodity research for Asia at Australia & New Zealand Banking Group in Shanghai and a former World Bank economist. “The benefit to China is that it will help in the perception of host countries if China is viewed as a responsible stakeholder in the global community.”
Bond Auction
Italy today is auctioning as much as 7 billion euros ($10 billion) of bonds to help pay for 14.5 billion euros of bonds maturing on Sept. 15. The euro region’s third-largest economy sold 11.5 billion euros of bills yesterday and priced its one- year notes to yield 4.153 percent, up from 2.959 percent at the previous auction last month.The yield on Italy’s 10-year bond rose to 5.69 percent as of 10:01 a.m. in Rome, pushing the spread with the equivalent German securities up 13 basis points to 396 basis points. The MSCI Asia Pacific index of stocks advanced 0.3 percent as of 4:50 p.m. in Tokyo after the Standard & Poor’s 500 index gained 0.7 percent overnight.
Chinese Image
For China, any purchases of European debt may allow the world’s largest exporter to be seen as helpful as it rebuffs calls to allow its exchange rate to appreciate at a faster pace. The world’s second largest economy has amassed record currency reserves of $3.2 trillion by selling yuan to limit gains.Chinese policy makers are thinking in a “global context” and about the need to prevent a “domino effect” in the European debt crisis, Zhang Yansheng, a researcher affiliated with the nation’s top economic planning agency, said today.
China’s central bank referred questions to the State Administration of Foreign Exchange, which didn’t respond to a request for comment. China Investment Corp., the nation’s sovereign-wealth fund, also didn’t respond.
Italy’s bond-yields rose to a euro-era record last month as the region’s sovereign debt crisis spread from Greece, the first to receive a European Union-led bailout. Prime Minister Silvio Berlusconi’s government rushed a 54 billion-euro austerity package to convince the European Central Bank to buy its debt.
Redemptions
Even so, the size of Italy’s debt — at 1.9 trillion euros more than Spain, Greece, Ireland and Portugal combined — leaves it vulnerable to any rise in borrowing costs as it refinances maturing securities. The country still needs to sell about 70 billion euros of debt this year to cover its deficit and finance redemptions.“We have heard this story before with regard to the likes of Spanish and Portuguese bonds, and in the end it was ECB buying and EU bailouts that seemed to have taken place rather than anything with a Chinese influence,” Gary Jenkins, a strategist at Evolution Securities in London, wrote in a research note.
Any Chinese purchases of euro-region debt to date haven’t produced a lasting cut in yield premiums for Greece, Portugal or Spain.
The extra yield investors demand to buy Greek 10-year debt over German bunds is about 23 percentage points, up from 14 percentage points three months ago. The equivalent spread for Portugal over Germany is 9.5 percentage points, up from 7.7 points over that period. Spain’s gap rose to 3.6 points from 2.5 points.
Too Big
“The issue with Europe is bigger than China alone can help with,” said Ju Wang, a fixed-income strategist at Barclays Capital in Singapore, adding that Italy’s debt load alone is a sum exceeding half the Chinese foreign-exchange reserves. “China probably will continue to help to shore up the euro, but its involvement in direct purchases of troubled Europe debt is unlikely to be too aggressive.”If Italy “falls” it may drag down Europe, the world and China’s economy, said Zhang, a researcher at the Institute of Foreign Economic Research affiliated to the National Development and Reform Commission.
Japanese Finance Minister Jun Azumi said today that European policy makers should decide themselves whether they need fiscal assistance from Japan. U.S. Treasury Secretary Timothy F. Geithner will travel to Poland on Sept. 16 to participate in a meeting of European government finance officials trying to contain the region’s debt crisis.
‘Helping Hand’
Premier Wen Jiabao said in June that China can offer “a helping hand” to Europe by buying a limited volume of sovereign bonds. The Asian nation pledged that month to buy Hungarian government bonds and agreed to extend a 1 billion euro loan for the financing of development projects in the European country that needed an International Monetary Fund-led bailout in 2008.Spain’s prime minister secured a Chinese pledge to invest in his nation’s faltering savings banks and in government debt on an April visit to Beijing.
In October, Wen said China will buy Greek bonds to support Greece’s shipping industry, while Chinese state-run banks agreed to $267.8 million in loans to three Greek shippers. President Hu Jintao visited Portugal in November and said China is “available to support, through concrete measures, Portuguese efforts to face the impacts caused by the international financial crisis.”
Diversification
Any Chinese purchases of euro-denominated debt may help it diversify its reserves away from dollars. The biggest foreign owner of U.S. government debt has doubled its holdings of Treasuries in the three years through June to about $1.17 trillion.China is playing a “white knight” role in assisting Europe and buying itself goodwill that will enable it to purchase more sensitive European assets such as technology companies, according to Stamford, Connecticut-based Faros Trading in a June report. The European Union still has an arms embargo on China, imposed after the Tiananmen Square massacre in 1989.
Some of China’s investments have returned losses. China Investment Corp. paid $3 billion for a 9.4 percent stake in private equity firm Blackstone in 2007 at a 4.5 percent discount to its initial public offering price of $31. The stock traded at $12.31 yesterday, which translates to a loss of more than $1.7 billion loss for China, according to data compiled by Bloomberg.
CIC, as the wealth fund is known, widened its investment horizon to 10 years from five years, the company said in July.
“They are trying to be helpful by diversifying a little within the euro zone community,” Michael Spence, a Nobel laureate in economics, said while attending a conference in Beijing today. “With relatively high yields, if there is a credible plan in Italy — Italy has very low private debt, its public debt is relatively stable if they adopt sensible policies — so could be quite a good investment as well.”
China unlikely to loosen monetary policy
Sept 13 (The Australian) – CHINA’s central bank says stabilising prices remains its priority, reinforcing signs that Beijing is unlikely to loosen the reins on the world’s No. 2 economy any time soon despite mounting global uncertainties.In a statement last night, the People’s Bank of China also gave fresh acknowledgment that its traditional measuring tools have failed to keep up with recent changes in the Chinese financial system. The bank said it is considering issuing an adjusted version of its benchmark measure of the supply of money in the economy to help plug the resulting gaps.
The PBOC’s statement came after economic data over the previous three days showing growth and inflation both easing somewhat, but remaining strong.
The data reinforced a growing consensus among economists that Beijing has likely pressed pause on any big monetary policy moves — after a series of rate increases over the last year — as it balances concerns about the weakness in advanced economies like Europe and the US against ongoing wariness over consumer prices at home.
“There is some control over the causes of rising prices, but they haven’t been eliminated,” the PBOC said last night. “Inflation remains high and stabilising prices remains the top macro-control policy.” The bank said China needs to continue its “prudent” monetary policy and maintain steady and appropriate credit growth.
Data issued by the PBOC on Sunday showed that money-supply growth slowed further last month, which the central bank said was in line with its “prudent” monetary policy. China’s broadest measure of money supply, M2, was up 13.5 per cent at the end of August from a year earlier, slower than the 14.7 per cent rise at the end of July, and below economists’ expectations of 14.5 per cent.
But the PBOC’s statement last night also said it is researching the addition of an “M2-Plus” measure of money supply, because the current M2 measure — which gauges bank deposits and cash in circulation — doesn’t capture funds in wealth management products, which have expanded dramatically this year. That means the M2 readings have understated the total growth in money, which is a factor in inflation.
“The official M2 growth number has become a little less reliable than it once was,” said Standard Chartered economists Li Wei and Stephen Green in a research note last week.
The PBOC noted that growth in lending hasn’t been slow so far this year, pointing out that bank lending in August was up about 10 billion yuan ($1.5bn) from the same month last year, when monetary policy was still loose.
“Overall liquidity conditions are appropriate and banks’ provision levels are normal,” the PBOC said. China’s financial institutions issued 548.5bn yuan of new yuan loans in August, up from 493bn yuan in July and above economists’ expectations of 500bn yuan.
China’s consumer price index rose 6.2 per cent in August from a year earlier, slowing from July’s 6.5 per cent increase, which was the fastest rise in more than three years.
EU Daily | Eurozone PMI at two-year low as new orders fall in all countries
Weakness and continued austerity. My guess is it will take serious blood in the streets before policy changes
IMF and eurozone clash over estimates
(FT) International Monetary Fund work, contained in a draft version of its Global Financial Stability Report, uses credit default swap prices to estimate the market value of government bonds of the three eurozone countries receiving IMF bail-outs – Ireland, Greece and Portugal – together with those of Italy, Spain and Belgium. Although the IMF analysis may be revised, two officials said one estimate showed that marking sovereign bonds to market would reduce European banks’ tangible common equity by about €200bn ($287bn), a drop of 10-12 per cent. The impact could be increased substantially, perhaps doubled, by the knock-on effects of European banks holding assets in other banks. The ECB and eurozone governments have rejected such estimates.
ECB Lends Euro-Area Banks 49.4 Billion Euros for Three Months(Bloomberg) The European Central Bank said it will lend euro-area banks 49.4 billion euros ($71.3 billion) in three-month cash. The ECB said 128 banks bid for the funds, which will be lent at the average of the benchmark rate over the period of the loan. The key rate is currently at 1.5 percent. Banks must repay 48.1 billion euros in previous three-month loans tomorrow. The ECB re-introduced an unlimited six-month loan this month and extended full allotment in its shorter-term operations through the end of the year as tensions on European money markets grew. ECB President Jean-Claude Trichet on Aug. 27 rejected the suggestion that there could be a liquidity crisis in Europe, citing the central bank’s non-standard measures.
Eurozone PMI at two-year low as new orders fall in all countries(Markit) Manufacturing PMI fell from 50.4 in July to 49.0 in August, its lowest level since August 2009 and below the earlier flash estimate of 49.7. National PMIs held just above the 50.0 no-change mark in Germany, the Netherlands and Austria, but signalled contractions in Ireland, France, Italy, Spain and Greece. Only the Irish PMI rose compared to July, but still remained in contraction territory. The weakness highlighted by the headline PMI reflected falling volumes of both output and new business in August. The Eurozone new orders-to-finished goods inventory ratio, which tends to lead the trend in production, fell to its lowest for almost two-and-a-half years.
European Central Bank Said To Purchase Italian Government BondsSept. 1 (Bloomberg) — The European Central Bank is buying Italian securities, according to two people with knowledge of the transactions. They declined to be identified because the transactions are confidential.
A spokesman for the ECB declined to comment.
Germans, Dutch, Finns to Meet on Crisis Amid Collateral SpatSept. 1 (Bloomberg) — The German, Dutch and Finnish finance ministers will meet on Sept. 6 in Berlin to discuss the euro-area debt crisis as a Finnish demand for collateral threatens to delay a second Greek bailout.
“We will discuss how to go forward with this crisis and the future,” Dutch Finance Minister Jan Kees de Jager told reporters in The Hague today. “It’s about fighting this fire, but more importantly, how do we prevent such a fire.”
Finland’s demand for collateral from Greece as a condition for contributing to a second rescue package has triggered calls for similar treatment from countries including Austria and the Netherlands. De Jager said an agreement on collateral shouldn’t take long to reach.
“I see room for a solution; there are proposals on the table to discuss,” De Jager said. “I think it will be possible to provide equal treatment for creditors without the disadvantage of the proposed deal between Finland and Greece, which is unthinkable because it uses extra money from the EFSF to provide collateral to Finland.”
The 440 billion-euro ($628 billion) European Financial Stability Facility is the euro region’s rescue fund.
Weidmann Says ECB Must Scale Back Crisis Measures to Reduce RiskSept. 1 (Bloomberg) — European Central Bank council member Jens Weidmann said the bank must scale back the additional risks it has shouldered to help counter the region’s debt crisis.
Measures taken by the ECB have “strained the existing framework of the currency union and blurred the boundaries between the responsibilities of monetary policy on one side and fiscal policy on the other,” Weidmann, who heads Germany’s Bundesbank, said at an event in Hanover today. Over time this can damage confidence in the central bank, he said. “It is therefore valid to scale back the extra risks monetary policy has taken on.”
The ECB is lending euro-area banks as much money as they need at its benchmark rate and has also re-started its bond purchase program — a step Weidmann opposed — in an attempt to stem the spreading debt crisis. While European leaders on July 21 re-tooled their 440-billion-euro ($629 billion) rescue fund, allowing it to buy government debt on the secondary market, national parliaments still need to ratify the changes.
“Decisions on taking further risks should be made by governments and parliaments, as only they are democratically legitimized,” Weidmann said.
He said one option for a long-term solution to Europe’s debt crisis could be “a real fiscal union.”
“Should one be unwilling or unable to take this path, then the existing no-bailout clause in the treaties, and the accompanying disciplining of fiscal policy, should be strengthened instead of being completely gutted,” he said.
Weidmann said his comments don’t relate to current economic developments or ECB policy, citing the one-week blackout prior to a rate decision. ECB officials will convene on Sept. 8 in Frankfurt.
German manufacturing PMI lowest since September 2009(Markit) At 50.9, down from 52.0 in July, the final seasonally adjusted Markit/BME Germany PMI was around one index point lower than the ‘flash’ figure of 52.0. Growth of German manufacturing output eased fractionally since the previous month and was the slowest since July 2009. Latest data pointed to a fall in intakes of new work for the second month running and the rate of contraction was the fastest since June 2009. The downturn in sales to export markets was highlighted by a further reduction in new business from abroad in August, with the rate of contraction also the sharpest for over two years. Meanwhile, stocks of finished goods at manufacturing firms accumulated at the steepest pace since the survey began in April 1996.
German Trade, Consumption Damped Second-Quarter GDP Growth(Bloomberg) Private consumption contracted 0.7 percent in the second quarter. GDP increased 0.1 percent from the first quarter, when it gained 1.3 percent, the office said, confirming its initial Aug. 16 estimate. Exports rose 2.3 percent from the first quarter, when they gained 2.1 percent. Imports surged 3.2 percent in the second quarter after rising 1.7 percent in the first. That resulted in net trade reducing GDP growth by 0.3 percentage point. Companies stocked up inventories, which contributed 0.7 percentage point to GDP growth. Gross investment also added 0.7 percentage point to growth. Private consumption subtracted 0.4 percentage point and a 0.9 percent decline in construction spending cut 0.1 percentage point off GDP.
Carrefour posts net loss in 1st half(AP) Europe’s largest retailer Carrefour SA posted an unexpected net loss in the first half and abandoned its growth target for the year amid the economic slowdown. The French retailer reported a net loss of euro249 million ($359 million) in the first six months of the year, compared with a profit of euro97 million a year earlier. Carrefour said it expects its operating profit to decline this year, reversing a target the retailer set in March when it said an ongoing and expensive “transformation plan” would raise profits this year. As it did last year, Carrefour booked what it calls “significant one-off charges” again in the first half. They amounted to euro884 million in the first half, over half of which went to writing down the value of Carrefour’s Italian assets.
Greece set to miss deficit target(AP) Greece is likely to miss its budget targets in 2011 even if it fully implements painful reforms a parliamentary panel of financial experts said. “The increase in the primary deficit in combination with a further drop in economic activity strengthens significantly the dynamics of debt, offsetting the benefits from the decisions of the summit of July 21, and distancing the possibility of stabilization of the debt to GDP in 2012,” the panel, known as the State Budget Office, wrote in a report. Citing government figures, it said the 2011 January-July deficit stands at euro15.59 billion ($22.53 billion) with a primary deficit of 2.4 percent of gross domestic product, as opposed to a euro12.45 billion ($17.99 billion) shortfall and 1.5 percent primary deficit in that period last year.
Italy Drops Pension Changes, Will Announce Budget Amendments(Bloomberg) The Italian government has dropped proposed changes to pension rules agreed to this week from a 45.5 billion-euro ($65.5 billion) austerity plan being discussed in parliament that aims to balance the budget by 2013. Giorgia Meloni, minister for youth and sport policy, told reporters that the government decided to withdraw the proposal agreed to by Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti two days ago. On Aug. 29, Berlusconi’s office announced that the government had dropped a planned bonus tax on Italians earning more than 90,000 euros a year and reduced cuts in transfers to regional and local authorities. It did not provide details of how the lost deficit reduction of 4.5 billion euros from those changes would be compensated.
Crisis exposes weakness of Italian coalition(FT) Giulio Tremonti, finance minister, was said to be in “damage limitation” mode on Wednesday, seeking to assure Italy’s partners that a budget could still get through parliament’s twin chambers by the end of next week, despite prime minister Silvio Berlusconi’s decision to jettison some key proposals, including a wealth tax. Three weeks after the centre-right cabinet agreed an austerity package – with €45.5bn ($65.4bn) of savings intended to balance the budget by 2013 – the government on Wednesday missed its self-imposed deadline to present legislation to the senate, the first step towards parliamentary approval. Insiders admit, however, that the budget could amount to a stopgap measure, the second since July, and might need to be reinforced at a later date.
Spanish PM: deficit cap amendment essential(AP) “It is true that it is a reform done in a very short time span, because we need it,” Prime minister Jose Luis Rodriguez Zapatero said. The amendment of the 1978 constitution enshrines the principle of budgetary discipline into Spain’s constitution, but does not specify numbers. These will come in a separate law that is to be passed by June 2012. The Socialists and conservatives have agreed the law will stipulate that Spain’s deficit cannot exceed 0.4 percent of GDP, but that threshold will not take effect until 2020. Their support is enough for the bill to pass when it is voted on Friday in the lower house of Parliament and presumably next week in the Senate. Time is pressing because the legislature dissolves Sept. 27 in order to get ready for general elections Nov. 20.
Spain Expects ‘Chain’ of Market Turbulence, Valenciano Says(Bloomberg) “We’re probably going to get back into a chain of financial turbulence in September and October,” Elena Valenciano, Socialist party campaign chief, said in an interview. Valenciano said the constitutional amendment is necessary as Spain must avoid following Greece, Ireland and Portugal into seeking a European bailout. “We have to say this because sometimes talking of a rescue seems almost something positive: any kind of intervention in Spain would be a great misfortune for the country,” she said. Valenciano said authorities “didn’t expect August to be as bad as it was” and that the gap may widen again in the next two months, “not so much because of our own debt, but because of Italy’s debt.”
Portugal Raises Taxes to Meet Deficit Targets in Rescue Plan(Bloomberg) Portugal will raise capital gains tax and increase levies on corporate profit and high earners to reach the deficit-reduction goals in its 78 billion-euro ($112 billion) bailout. The government will impose a tax surcharge of 3 percent on companies with income above 1.5 million euros, add a bonus tax of 2.5 percent on the highest earners and raise the levy on capital gains by 1 percentage point to 21 percent, Finance Minister Vitor Gaspar said. The moves will help trim the budget deficit from 5.9 percent of gross domestic product this year to the European Union ceiling of 3 percent in 2013, he said. The shortfall will narrow to 0.5 percent in 2015. The government will reduce its deficit even as the economy contracts 2.2 percent this year and 1.8 percent next year, before expanding 1.2 percent in 2013, he said.
Ireland’s unemployment rate rises to 14.4 percent(AP) Ireland’s unemployment rate has risen to 14.4 percent. Ireland has been trying to escape its 3-year recession through export growth led by its multinational companies. But the domestic economy remains dormant because of weak consumer demand, high household debts and a collapsed real-estate market. The Central Statistics Agency said Wednesday that unemployment rose from July’s rate of 14.3 percent, the fourth straight monthly increase. A record-high 470,000 people in Ireland, a country of 4.5 million, are claiming welfare payments for joblessness. About 17 percent are foreigners, chiefly Eastern Europeans who immigrated during the final years of Ireland’s 1994-2007 Celtic Tiger boom.
MMT to Ryan- Apologize NOW about the US being the next Greece
Congressman Ryan’s response to the President Obama’s State of the Union address included
something we’ve all hear a lot of ever since.
He warned along the lines that that the US could become the next Greece,
and be faced with some kind of a sudden financial crisis,
where the world would no longer lend to us,
interest rates would skyrocket,
and the US,
unable to spend,
would be down on it’s knees before the IMF begging for the needed funding.
And no one with any kind of national public forum took issue with him.
Including the President and the Democrats in Congress,
who for all appearances quietly agreed and acted accordingly.
Well, today, based on the near universal response to the S&P downgrade,
everyone now knows, or should know,
there is no such thing as the US becoming the next Greece.
The overwhelming response to the S&P downgrade by everyone from Buffet to Greenspan, and
most every financial and academic economist in the world was along the lines of:
The US is the issuer of the dollar.
It can print dollars.
So it can always make timely payments without limit.
THERE IS NO SOLVENCY ISSUE FOR THE US.
There is no such thing as the US running out of dollars to spend.
There is no such thing as the US being dependent on taxing or borrowing to get dollars to spend.
Greece is very different.
Greece, Ireland, Italy, and all the euro member nations, corporations, and households can’t print euro,
any more than the US states, corporations, and households can print dollars.
And so they are all indeed dependent on revenues from somewhere to be able to spend.
So, Congressman Ryan, please apologize NOW for being so wrong and so misleading.
There is no solvency risk for the US.
The Fed is price setter for the interest rates for the US government and the banking system, not the market,
just like the European Central Bank sets the interest rates for its banking system and its own debt.
Congressman Ryan,
your reasons for deficit reduction have vaporized.
You see,
the risk of overspending is inflation,
not solvency.
So if you want to argue for deficit reduction,
apologize NOW,
regroup,
and come back with your next round of fear mongering
about how the deficit can be inflationary,
or something like that,
and see how that flies.
Personal income and spending lower, savings up
Still no mention of how the federal deficit contributes to savings.
Or how QE and 0 rates have lowered personal income.
Now that the debt ceiling hike looks to be passed,
we’re back to the ‘death by 1000 cuts’ scenario.
Jury still out on whether China is in the process of a hard landing
UK austerity keeping a lid on demand there
Eurozone seems to be slowing as well, as Italy and Spain watch funding costs escalate.
As the carpenter once remarked, ‘no matter how much I cut off it’s still too short…’
But in the first half stocks did show they can make reasonable returns with very modest GDP growth.
While unemployment showed it doesn’t come down with only modest GDP growth.
Personal Spending Down 0.2% While Income Growth Slows
By: ReutersUS consumer spending unexpectedly fell in June to post the first decline in nearly two years as incomes barely rose, a government report showed, suggesting economic growth could remain subdued in the third quarter.
The Commerce Department said consumer spending slipped 0.2 percent, the first drop since September 2009, after edging up 0.1 percent in May.
Economists polled by Reuters had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.2 percent.
When adjusted for inflation, spending was flat in June after easing 0.1 percent the prior month. The decline came even as gasoline prices retreated from their peak just above $4 a gallon in early May and suggested the much-anticipated bounce back growth in the third quarter would lack vigor.
Consumer spending barely grew in the second quarter, inching up at an annual rate of only 0.1 percent—the weakest pace since the end of the 2007-09 recession. Spending increased at a 2.1 percent rate in the first quarter.
That contributed to hold the economy to an anemic growth pace of 1.3 percent in the second quarter.
The weak spending in June also reflected tepid income growth after employment growth ground to a near halt in June, with nonfarm payrolls rising only 18,000. Income ticked up 0.1 percent, the smallest increase since November, after rising 0.2 percent in May.
Disposable income ticked up 0.1 percent, also the smallest increase since November. But when adjusted for inflation, disposable income rose 0.3 percent. With real disposable income outpacing spending, savings rose to $620.6 billion from $581.7 billion in May.
EU stance shifts on Greece default
Mosler bonds issued to both address current funding requirements and buy back discounted Greek govt debt would further enhance the credit worthiness of those bonds by further and substantially reducing Greek govt interest expense.
Interesting how the word now coming out on the French plan, which initially was greeted with a near celebration, is now entirely negative to the point where it’s being dismissed.
And default discussions now moving to the front burner is telling, as just last week that was proclaimed ‘out of the question’
EU stance shifts on Greece default
By Peter Spiegel and Patrick Jenkins
July 10 (FT) — European leaders are for the first time prepared to accept that Athens should default on some of its bonds as part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing.
The new strategy, to be discussed at a Brussels meeting of eurozone finance ministers on Monday, could also include new concessions by Greece’s European lenders to reduce Athens’ debt, such as further lowering interest rates on bail-out loans and a broad-based bond buyback programme. It also marks the possible abandonment of a French-backed plan for banks to roll-over their Greek debt.
“The basic goal is to reduce the debt burden of Greece both through actions of the private sector and the public sector,” said one senior European official involved in negotiations.
Officials cautioned the new tack was still in the early stages, and final details were not expected until late summer. But if the strategy were agreed, it would mark a significant shift in the 18-month struggle to contain the eurozone debt crisis.
Until now, European leaders have been reluctant to back any plan categorised as a default for fear it could lead to a flight by investors from all bonds issued by peripheral eurozone countries – including Italy and Spain, the eurozone’s third and fourth largest economies.
Yields on Italian bonds, which move inversely to prices, rose sharply last week due to the Greek uncertainty. Senior European leaders – including Jean-Claude Trichet, European Central Bank chief, and Jean-Claude Junker, head of the euro group – are to meet top European Union officials ahead of Monday’s finance ministers’ gathering amidst growing fears of contagion.
A German-led group of creditor countries has for weeks been attempting to get “voluntary” help from private bondholders to delay repayment of Greek bonds, a move they hoped would lower Greece’s overall debt while avoiding a default.
But in recent days, debt rating agencies warned any attempt to get bondholders to participate would represent a selective default. Rather than abandon bondholder buy-ins, however, several European leaders have decided to return to a German-backed plan to push current Greek debt holders to swap their holdings for new, longer-maturing bonds.
The move essentially scraps a French proposal unveiled last month, which many analysts believed would only add to Greek debt levels by offering expensive incentives for banks that hold Greek debt to roll over their maturing bonds.
Officials said the Institute of International Finance, the group representing large banks holding Greek debt, has gradually moved away from the French plan and begun to embrace elements of the German plan.
“There’s some convergence in the banking community towards a more realistic plan than the French plan, which was out of this world,” said the senior European official. The plan criticised as being self-serving for the banks.
According to executives involved in the IIF talks, banks have pushed for a Greek bond buyback plan in return for agreeing to a restructuring programme, arguing that only if Greece’s overall debt were reduced could a sustainable recovery occur.
European officials said there was support for the proposal in government circles. The plan, originally pushed by German investors, including Deutsche Bank, could see as much as 10 per cent of outstanding Greek debt repurchased on the open market.
Since Greek bonds are currently trading below face value, such purchases would essentially be a voluntary “haircut”, since bondholders would accept payment for far less than the bonds are worth.
It remains unclear how a buyback would be financed, however. The European Commission has long pushed for the eurozone’s €440bn bail-out fund to be used for buybacks, but Berlin blocked the proposal.
ECB Seeks Expansion of Euro-Rescue Fund to Help Italy, Welt Says
Wonder what that does to the remaining contributing nations balance sheets?
Not good, and increases the likelihood of Italy getting seriously tested.
:(
ECB Seeks Expansion of Euro-Rescue Fund to Help Italy, Welt Says
By Karin Matussek
July 10 (Bloomberg) — The European Central Bank is seeking to have the euro-rescue fund expanded to include help for Italy, Die Welt reported, citing unidentified “high ranking” people at central banks.
The fund may have to be doubled to 1.5 trillion euros($2.14 trillion) to cover a crisis in Italy, the ECB said according to the German newspaper.
Central banks are no longer ready to buy government debt, so the rescue fund should take on that task instead, according to the bankers, Die Welt said preview of an article for tomorrow’s edition.
NATO denies rumor Italy has surrendered
Japan- G-7 Statement on Currencies, ‘Concerted Intervention’
In the context of this ‘everyone’s out of paradigm’ world, it makes sense for Japan’s MOF (Ministry of Finance) to buy dollars vs yen.
But it makes no sense to do this as a coordinated effort with other nations also buying dollars vs yen.
It does make sense for the MOF to ask the G7 for permission to buy dollars, as the ‘out of paradigm’ world considers that kind of thing ‘currency manipulation,’ and brands those nations that do buy fx as currency manipulators and outlaws. And they consider this kind of ‘competitive devaluation’ as a ‘beggar thy neighbor’ policy that robs others of aggregate demand. The last thing they all want to happen is a trade war, where each nation buys the other’s currency trying to weaken his own.
So it’s interesting that the rest of world has agreed to allow Japan to conduct this kind of ’emergency measure.’ It probably means it will be short term and limited.
However the strong yen itself may have only been an initial, temporary phenomena as Japan’s domestic households and businesses move to hoard yen liquidity in anticipation of looming yen expenses. That includes reduced borrowing for the likes of cars and homes as well as widely discussed converting of dollar and other fx deposits to yen deposits. This all works to make the yen ‘harder to get’ and keep it firmly bid.
What follows the initial flight to yen liquidity, however, is the spending of the yen, which makes yen ‘easier to get’. And with that comes more spending on imports, which means those yen spent on net imports are likely to get sold for dollars and other fx by the exporters selling to Japan, to meet their own ongoing liquidity needs.
Additionally, Japan”s budget deficit will rise, which makes yen easier to get by adding yen income and net financial assets to the economy, all of which contributes to a weaker yen. The deficit can rise either proactively, as may be happening with the (relatively modest, but a good start)10 trillion yen govt. rebuilding initiative just now announced, or reactively via increased transfer payments and falling tax revenues due to the fall off in economic activity.
And if they try to contain their deficit spending by implementing the consumption tax hike recently discussed, that will only make things worse, and further increase the reactive deficit spending.
Also, weaker exports and a smaller trade surplus due to supply issues likewise weaken the yen.
As for the BOJ, nothing they do with regards to ‘liquidity injections’ will matter, apart from keeping rates about where they are.
And not to forget that what’s happening in the Middle East, where that pot is still boiling as well.
In my humble opinion this remains a good time to be on the sidelines.
G-7 Statement on Currencies, ‘Concerted Intervention’
March 18 (Bloomberg) — The following is a joint statement
released today by officials from the Group of Seven industrial
nations. The G-7 includes the U.S., Japan, Germany, France, the
U.K., Italy and Canada.
“We, the G-7 Finance Ministers and Central Bank Governors,
discussed the recent dramatic events in Japan and were briefed
by our Japanese colleagues on the current situation and the
economic and financial response put in place by the authorities.
“We express our solidarity with the Japanese people in
these difficult times, our readiness to provide any needed
cooperation and our confidence in the resilience of the Japanese
economy and financial sector.
“In response to recent movements in the exchange rate of
the yen associated with the tragic events in Japan, and at the
request of the Japanese authorities, the authorities of the
United States, the United Kingdom, Canada, and the European
Central Bank will join with Japan, on March 18, 2011, in
concerted intervention in exchange markets. As we have long
stated, excess volatility and disorderly movements in exchange
rates have adverse implications for economic and financial
stability. We will monitor exchange markets closely and will
cooperate as appropriate.”
A few Boehnalities and other notables on the US going broke
Cross currents of right and wrong but always for the wrong reasons.
Bonds Show Why Boehner Saying We’re Broke Is Figure of Speech
By David J. Lynch
March 7 (Bloomberg) — House Speaker John Boehner routinely offers this diagnosis of the U.S.’s fiscal condition: “We’re broke; Broke going on bankrupt,” he said in a Feb. 28 speech in Nashville.
Boehner’s assessment dominates a debate over the federal budget that could lead to a government shutdown. It is a widely shared view with just one flaw: It’s wrong.
“The U.S. government is not broke,” said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. in New York. “There’s no evidence that the market is treating the U.S. government like it’s broke.”
Wrong reason! Broke implies not able to spend.
The US spends by crediting member bank accounts at the Fed, and taxes by debiting member bank accounts at the Fed.
It never has nor doesn’t have any dollars.
The U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007.
That’s simply a function of where the Fed, a agent of Congress, has decided to set rates, and market perceptions of where it may set rates in the future. Solvency doesn’t enter into it.
Financial products that pay off if Uncle Sam defaults aren’t attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.
All taxing does is debit member bank accounts. The govt doesn’t actually ‘get’ anything.
To be sure, the U.S. confronts long-term fiscal dangers.
For example???
Over the past two years, federal debt measured against total economic output has increased by more than 50 percent and the White House projects annual budget deficits continuing indefinitely.
So?
“If an American family is spending more money than they’re making year after year after year, they’re broke,” said Michael Steel, a spokesman for Boehner.
So?
What does that have to do with govts ability to credit accounts at its own central bank?
$1.6 Trillion Deficit
A person, company or nation would be defined as “broke” if it couldn’t pay its bills, and that is not the case with the U.S. Despite an annual budget deficit expected to reach $1.6 trillion this year, the government continues to meet its financial obligations, and investors say there is little concern that will change.
Still, a rhetorical drumbeat has spread that the U.S. is tapped out. Republicans, including Representative Ron Paul of Texas, chairman of the House domestic monetary policy subcommittee, and Fox News commentator Bill O’Reilly, have labeled the U.S. “broke” in recent days.
Chris Christie, the Republican governor of New Jersey, said in a speech last month that the Medicare program is “going to bankrupt us.” Julian Robertson, chairman of Tiger Management LLC in New York, told The Australian newspaper March 2: “we’re broke, broker than all get out.”
A similar claim was even made Feb. 28 by comedian Jon Stewart, the host of “The Daily Show” on Comedy Central.
So much for their legacies.
Cost of Insuring Debt
Financial markets dispute the political world’s conclusion. The cost of insuring for five years a notional $10 million in U.S. government debt is $45,830, less than half the cost in February 2009, at the height of the financial crisis, according to data provider CMA data. That makes U.S. government debt the fifth safest of 156 countries rated and less likely to suffer default than any major economy, including every member of the
G20.
There are two factors in default insurance. Ability to pay and willingness to pay. While the US always has the ability to pay, Congress does not always show a united willingness to pay. Hence the actual default risk.
Creditors regard Venezuela, Greece and Argentina as the three riskiest countries. Buying credit default insurance on a notional $10 million of those nations’ debt costs $1.2 million, $950,000 and $665,000 respectively.
“I think it’s very misleading to call a country ‘broke,'” said Nariman Behravesh, chief economist for IHS Global Insight in Lexington, Massachusetts. “We’re certainly not bankrupt like Greece.”
In any case, the euro zone member nations put themselves in the fiscal position of US states when they joined the euro.
That means a state like Illinois could be the next Greece, but not the US govt.
Less Likely to Default
CMA prices for credit insurance show that global investors consider it more likely that France, Japan, China, the United Kingdom, Australia or Germany will default than the U.S.
Pacific Investment Management Co., which operates the largest bond fund, the $239 billion Total Return Fund, sees so little risk of a U.S. default it may sell other investors insurance against the prospect. Andrew Balls, Pimco managing director, told reporters Feb. 28 in London that the chances the U.S. would not meet its obligations were “vanishingly small.”
Presumably a statement with regard to willingness of Congress to pay.
George Magnus, senior economic adviser for UBS Investment Bank in London, says the U.S. dollar’s status as the global economy’s unit of account means the U.S. can’t go broke.
That has nothing to do with it.
“You have the reserve currency,” Magnus said. “You can print as much as you need. So there’s no question all debts will be repaid.”
Any nation can do that with its own currency
The current concerns over debt contrast with the views of founding father Alexander Hamilton, the nation’s first Treasury secretary. At Hamilton’s urging, the federal government in 1790 absorbed the Revolutionary War debts of the states and issued new government securities in about the same total amount.
Alexander Hamilton
Unlike today’s debt critics, Hamilton “had no intention of paying off the outstanding principal of the debt,” historian Gordon S. Wood wrote in “Empire of Liberty: A History of the Early Republic 1789-1815.”
Instead, by making regular interest payments on the debt, Hamilton established the U.S. government as “the best credit risk in the world” and drew investors’ loyalties to the federal government and away from the states, wrote Wood, who won a Pulitzer Prize for a separate history of the colonial period.
Far be it from me to argue with a Pulitzer Prize winner…
From Oct. 1, 2008, the beginning of the 2009 fiscal year, through the current year, which ends Sept. 30, 2011, the U.S. will have added more than $4.3 trillion of debt. Despite White House forecasts of an additional $2.4 trillion of debt over the next three fiscal years, investors’ appetite for Treasury securities shows little sign of abating.
It’s just a reserve drain- get over it!
Govt spending credits member bank reserve accounts at the Fed
Tsy securities exist as securities accounts at the Fed.
‘Going into debt’ entails nothing more than the Fed debiting Fed reserve accounts and crediting Fed securities accounts and ‘paying off the debt’ is nothing more than debiting securities accounts and crediting reserve accounts
No grandchildren involved.
Longer-Term Debt
In addition to accepting low yields on two-year notes, creditors are willing to lend the U.S. money for longer periods at interest rates that are below long-term averages. Ten-year U.S. bonds carry a rate of 3.5 percent, compared with an average 5.4 percent since 1990. And U.S. debt is more attractive than comparable securities from the U.K., which has moved aggressively to rein in government spending. U.K. 10-year bonds offer a 3.6 percent yield.
“You are never broke as long as there are those who will buy your debt and lend money to you,” said Edward Altman, a finance professor at New York University’s Stern School of Business who created the Z-score formula that calculates a company’s likelihood of bankruptcy.
Who also completely misses the point.
Any doubts traders had about the solvency of the U.S. would immediately be reflected in the markets, a fact noted by James Carville, a former adviser to President Bill Clinton, after he saw how bond investors could determine the success or failure of economic policy.
No they can’t.
“I used to think if there was reincarnation, I wanted to come back as the president or the Pope or a .400 baseball hitter,” Carville said. “But now I want to come back as the bond market. You can intimidate everyone.”
Only those who don’t know any better.
Republican Dissenters
Republican assertions that the U.S. is “broke” are shorthand for a complex fiscal situation, and some in the party acknowledge the claim isn’t accurate.
“To say your debts exceed your income is not ‘broke,'” said Tony Fratto, former White House and Treasury Department spokesman in the George W. Bush administration.
The U.S. government nonetheless faces a daunting gap between its expected financial resources
It’s not about ‘financial resources’ when it comes to a govt that never has nor doesn’t have any dollars, and just changes numbers in our accounts when it spends and taxes
and promised future outlays. Fratto said the Obama administration’s continued accumulation of debt risked a future crisis, as most major economies also face growing debt burdens.
The burden is that of making data entries.
In the nightmare scenario, a crush of countries competing to simultaneously sell IOUs to global investors could bid up the yield on government debt and compel overleveraged countries such as the U.S. to abruptly slash public spending.
It could only compel leaders who didn’t know how it all worked to do that.
Not selling the debt simply means the dollars stay in reserve accounts at the Fed and instead of being shifted by the Fed to securities accounts. Why would anyone who knew how it worked care which account the dollars were in? Especially when spending has nothing, operationally, to do with those accounts.
Fratto dismissed the markets’ current calm, noting that until the European debt crisis erupted early last year, investors had priced German and Greek debt as near equivalents.
“Markets can make mistakes,” Fratto said.
So can he. That all applies to the US states, not the federal govt.
$9.4 Trillion Outstanding
If recent budgetary trends continue unchanged, the U.S. risks a fiscal day of reckoning, slower growth or both.
No it doesn’t.
Altman notes that the U.S. debt outstanding is “enormous.” As of the end of 2010, debt held by the public was $9.4 trillion or 63 percent of gross domestic product — roughly half of the corresponding figures for Greece (126.7 percent) and Japan (121 percent) and well below countries such as Italy (116 percent), Belgium (96.2 percent) and France (78.1 percent).
Once a country’s debt-to-GDP ratio exceeds 90 percent, median annual economic growth rates fall by 1 percent, according to economists Kenneth Rogoff and Carmen Reinhart.
Wrong, that’s for convertible currency/fixed exchange rate regimes, not nations like the US, Uk, and Japan which have non convertible currencies and floating exchange rates.
The Congressional Budget Office warns that debt held by the public will reach 97 percent of GDP in 10 years if certain tax breaks are extended rather than allowed to expire next year and if Medicare payments to physicians are held at existing levels rather than reduced as the administration has proposed.
So???
AAA Rating
For now, Standard & Poor’s maintains a stable outlook on its top AAA rating on U.S. debt, assuming the government will “soon reveal a credible plan to tighten fiscal policy.” Debate over closing the budget gap thus far has centered on potential spending reductions. S&P says a deficit-closing plan “will require both expenditure and revenue measures.”
Measured against the size of the economy, U.S. federal tax revenue is at its lowest level since 1950. Tax receipts in the 2011 fiscal year are expected to equal 14.4 percent of GDP, according to the White House. That compares with the 40-year average of 18 percent, according to the Congressional Budget Office. So if tax receipts return to their long-term average amid an economic recovery, about one-third of the annual budget deficit would disappear.
Likewise, individual federal income tax rates have declined sharply since the top marginal rate peaked at 94 percent in 1945. The marginal rate — which applies to income above a numerical threshold that has changed over time — was 91 percent as late as 1963 and 50 percent in 1986. For 2011, the top marginal rate is 35 percent on income over $373,650 for individuals and couples filing jointly.
Not Overtaxed
Americans also aren’t overtaxed compared with residents of other advanced nations. In a 28-nation survey, only Chile and Mexico reported a lower total tax burden than the U.S., according to the Organization for Economic Development and Cooperation.
In 2009, taxes of all kinds claimed 24 percent of U.S. GDP, compared with 34.3 percent in the U.K., 37 percent in Germany and 48.2 percent in Denmark, the most heavily taxed OECD member.
“By the standard of U.S. history, by the standard of other countries — by the standard of where else are we going to get the money — increased tax revenues have to be a part of the solution,” said Jeffrey Frankel, an economist at Harvard University who advises the Federal Reserve Banks of Boston and New York.
So much for his legacy.