Dangerous Delusions about the United States’ Fiscal Health
Published in La Tribune
(France) on 17 May 2010
by Marc Fiorentino, strategist for Allofinance.com (link to original)
Greece, Spain, Portugal, Ireland and even, as one might expect, England. These countries are besieged and assailed on a daily basis by the world's foremost strategists. They are subject to a detailed and non-stop analysis of their principal weaknesses, their deficits and their debts. Investors snub the eurozone; the euro too. Despite the European revival plan, things have not rebounded and may require a concerted hypothetical intervention by the central banks to halt the financial downfall. Japan also has found no favor in the eyes of investors. Its debt level — as a percent of GDP — is certainly comparable to that of Zimbabwe and Lebanon, but remember, the level of household savings in Japan, to a large extent, covers the financial requirements of the state.
So to whom do we turn to for safety? Which country should be recognized as the good student and today carry on with virtual impunity in the eyes of investors? The United States! Unbelievable, isn't it? For the past few weeks the dollar has even become a safe haven. The euro is sold to buy the dollar, the pound sterling is sold to buy the dollar and the yen is sold to buy the dollar. The American bonds are rated AAA by the very same agencies that so gleefully bestowed high ratings on those weapons of mass destruction, the subprime mortgage instruments. And yet these American AAA bonds continue to attract investors deluded by their Hollywood view of the USA. Really, delusion is what this is all about.
All economists recognize that the financial situation of the United States is not promising. The primary deficit (which excludes interest on debt) of the country, as the Swiss newspaper Le Temps points out, is 7.3 percent of GDP versus 6 percent for Greece. The debt is not at all reassuring. The official debt is not reassuring, and the real debt that takes into account "off the books" liabilities, such as guarantees to hemorrhaging American mortgage agencies, is even less reassuring.
So why is the system favorable to the United States and the dollar? The argument they make is simple: "The United States has a horrendous deficit and debt, but it is a country that knows how to rebound and generate growth." But this view of a fighting America that rebounds is very dated and obsolete. It is very "1980s." Nowadays, the Americans of 2010 have nothing in common with those that elected Ronald Reagan. More and more they yearn for a European-style social model: they are older, more anxious, less entrepreneurial, want security and they seem to want to save money rather than over consume. Their heroes are tired and it will most likely be Michael Moore who shoots the next Rambo.
Without a doubt, growth predictions for the United States far exceed those for Europe. But that won't suffice to save them from the larger problem of refinancing their debt. A 3 percent growth rate won't suffice to compensate for the devastating "subprime mortgage" crisis. Really, a 5 percent or 6 percent rate is needed for up to four to five years. Even with this hypothetical growth the debt will continue to rise because Americans desire a welfare state.
The markets, the "hedge funds" and the investors still don't want face up to reality. They prefer at this moment to attack the most obvious targets. But the rise of the dollar is an aberration. The same goes for the level of long-term rates in America. And financial history has shown that trees don't grow into the stratosphere and that bubbles always burst. When? The timing is impossible to say. But the day when investors remove their rose-tinted American 3-D glasses, they will run for cover, and on that day the euro will become the safe haven. Don't laugh. You'll see. It’s only a question of months, even weeks ...
So to whom do we turn to for safety? Which country should be recognized as the good student and today carry on with virtual impunity in the eyes of investors? The United States! Unbelievable, isn't it? For the past few weeks the dollar has even become a safe haven. The euro is sold to buy the dollar, the pound sterling is sold to buy the dollar and the yen is sold to buy the dollar. The American bonds are rated AAA by the very same agencies that so gleefully bestowed high ratings on those weapons of mass destruction, the subprime mortgage instruments. And yet these American AAA bonds continue to attract investors deluded by their Hollywood view of the USA. Really, delusion is what this is all about.
All economists recognize that the financial situation of the United States is not promising. The primary deficit (which excludes interest on debt) of the country, as the Swiss newspaper Le Temps points out, is 7.3 percent of GDP versus 6 percent for Greece. The debt is not at all reassuring. The official debt is not reassuring, and the real debt that takes into account "off the books" liabilities, such as guarantees to hemorrhaging American mortgage agencies, is even less reassuring.
So why is the system favorable to the United States and the dollar? The argument they make is simple: "The United States has a horrendous deficit and debt, but it is a country that knows how to rebound and generate growth." But this view of a fighting America that rebounds is very dated and obsolete. It is very "1980s." Nowadays, the Americans of 2010 have nothing in common with those that elected Ronald Reagan. More and more they yearn for a European-style social model: they are older, more anxious, less entrepreneurial, want security and they seem to want to save money rather than over consume. Their heroes are tired and it will most likely be Michael Moore who shoots the next Rambo.
Without a doubt, growth predictions for the United States far exceed those for Europe. But that won't suffice to save them from the larger problem of refinancing their debt. A 3 percent growth rate won't suffice to compensate for the devastating "subprime mortgage" crisis. Really, a 5 percent or 6 percent rate is needed for up to four to five years. Even with this hypothetical growth the debt will continue to rise because Americans desire a welfare state.
The markets, the "hedge funds" and the investors still don't want face up to reality. They prefer at this moment to attack the most obvious targets. But the rise of the dollar is an aberration. The same goes for the level of long-term rates in America. And financial history has shown that trees don't grow into the stratosphere and that bubbles always burst. When? The timing is impossible to say. But the day when investors remove their rose-tinted American 3-D glasses, they will run for cover, and on that day the euro will become the safe haven. Don't laugh. You'll see. It’s only a question of months, even weeks ...