Bring Out The Bazooka
Published in die Tageszeitung
(Germany) on 22 November 2011
by Ulrike Herrmann (link to original)
(Germany) on 22 November 2011
by Ulrike Herrmann (link to original)
Translated from
by Ron Argentati.
Edited by Gillian Palmer .
Not even turbulent U.S. politics can scare off investors.
The bottom line is gigantic: The United States is $15 trillion in debt. But that doesn't seem to bother anyone. Undeterred, investors continue to shovel money into America. For a 10-year bond, the U.S. only pays 1.9 percent interest. That's not only nothing, it's less than nothing; inflation is currently at 3.53 percent, so investors lose when they invest in America.
Even more amazing: Not even turbulent American politics frightens investors. Placidly, they took the news on Monday that the U.S. Congress was unable to agree on a debt reduction program. As if nothing at all had happened, returns on U.S. bonds remained sensationally low.
Europeans can only be envious. Most European Union countries have far lower debt than the U.S. but nevertheless appear headed for bankruptcy. Spaniards must now pay around 7 percent interest, something no country can do for very long, despite the fact that their debt is only at 70 percent of GDP. In the United States, on the other hand, debt is closing in on 100 percent of GDP. Washington is nonetheless able to easily borrow trillions while investors panic at the thought of investing in Spain, Belgium, Italy and, most recently, France as well.
Even warnings from the ratings agencies don't bother the investors. The United States lost its AAA rating in August while Austria and France have retained theirs, but the U.S. still enjoys low interest while France and Austria pay nearly twice what America does.
Why is the United States so favored? The first reason is simple: In an emergency, the U.S. Federal Reserve is prepared to continue purchasing U.S. treasuries not bought by private investors on an unlimited basis. The Fed sees itself as the “lender of last resort.” This knowledge reassures investors immensely. They can be assured that their American bonds will continue to be serviced. Such assurance in these uncertain times is worth its weight in gold, which is why investors are willing to accept negative real interest rates.
But how different the European situation: The European Central Bank (EZB) is not permitted to keep purchasing government bonds on a limitless basis. That being said, they already hold far more than €190 billion, but this is intended to be a temporary exemption. Investors, therefore, remain panicked and demand higher risk premiums because they assume that after Greece, other EU nations will be forced to reduce debt levels, too.
The Americans are stunned that Europeans refuse to use their most powerful weapon. President Obama and his Treasury secretary, Tim Geithner, have been insisting for months that European start using the bazooka known as the EZB. The U.S. embassy in Berlin constantly advises Germany to copy the Fed strategy.
But it is not just monetary policy that makes America so popular with investors. Another reason is that the United States can easily reduce its debt level at will. All it has to do is increase taxes on the wealthy. American billionaire Warren Buffet has repeatedly calculated that his tax rate is at a laughable 17 percent. The Congressional Budget Office (CBO) has also calculated that the U.S. budget could be in large measure remedied by simply eliminating the Bush tax cuts for the super rich alone.
And third, there's a very banal reason why investors keep flocking to the United States: Where else are they going to go? They can't park their money on Mars while there's an “investor meltdown” here on Earth. Those who don't wish to invest in dollars or Euros are left with the Pound Sterling, the Yen and the Swiss Franc, but all three of those currencies are too small to absorb the mass of money orbiting around the planet. That's why investors so fervently hope that the Europeans take a lesson from America and begin blasting away with the EZB bazooka.
The bottom line is gigantic: The United States is $15 trillion in debt. But that doesn't seem to bother anyone. Undeterred, investors continue to shovel money into America. For a 10-year bond, the U.S. only pays 1.9 percent interest. That's not only nothing, it's less than nothing; inflation is currently at 3.53 percent, so investors lose when they invest in America.
Even more amazing: Not even turbulent American politics frightens investors. Placidly, they took the news on Monday that the U.S. Congress was unable to agree on a debt reduction program. As if nothing at all had happened, returns on U.S. bonds remained sensationally low.
Europeans can only be envious. Most European Union countries have far lower debt than the U.S. but nevertheless appear headed for bankruptcy. Spaniards must now pay around 7 percent interest, something no country can do for very long, despite the fact that their debt is only at 70 percent of GDP. In the United States, on the other hand, debt is closing in on 100 percent of GDP. Washington is nonetheless able to easily borrow trillions while investors panic at the thought of investing in Spain, Belgium, Italy and, most recently, France as well.
Even warnings from the ratings agencies don't bother the investors. The United States lost its AAA rating in August while Austria and France have retained theirs, but the U.S. still enjoys low interest while France and Austria pay nearly twice what America does.
Why is the United States so favored? The first reason is simple: In an emergency, the U.S. Federal Reserve is prepared to continue purchasing U.S. treasuries not bought by private investors on an unlimited basis. The Fed sees itself as the “lender of last resort.” This knowledge reassures investors immensely. They can be assured that their American bonds will continue to be serviced. Such assurance in these uncertain times is worth its weight in gold, which is why investors are willing to accept negative real interest rates.
But how different the European situation: The European Central Bank (EZB) is not permitted to keep purchasing government bonds on a limitless basis. That being said, they already hold far more than €190 billion, but this is intended to be a temporary exemption. Investors, therefore, remain panicked and demand higher risk premiums because they assume that after Greece, other EU nations will be forced to reduce debt levels, too.
The Americans are stunned that Europeans refuse to use their most powerful weapon. President Obama and his Treasury secretary, Tim Geithner, have been insisting for months that European start using the bazooka known as the EZB. The U.S. embassy in Berlin constantly advises Germany to copy the Fed strategy.
But it is not just monetary policy that makes America so popular with investors. Another reason is that the United States can easily reduce its debt level at will. All it has to do is increase taxes on the wealthy. American billionaire Warren Buffet has repeatedly calculated that his tax rate is at a laughable 17 percent. The Congressional Budget Office (CBO) has also calculated that the U.S. budget could be in large measure remedied by simply eliminating the Bush tax cuts for the super rich alone.
And third, there's a very banal reason why investors keep flocking to the United States: Where else are they going to go? They can't park their money on Mars while there's an “investor meltdown” here on Earth. Those who don't wish to invest in dollars or Euros are left with the Pound Sterling, the Yen and the Swiss Franc, but all three of those currencies are too small to absorb the mass of money orbiting around the planet. That's why investors so fervently hope that the Europeans take a lesson from America and begin blasting away with the EZB bazooka.