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This year all eyes have been on Europe. In a recent poll even most Guardian readers now accept that the EU is not good for Britain and that joining the Euro would be a disaster. “I say unto you, that likewise joy shall be in heaven over one sinner that repenteth, more than over ninety and nine just persons, which need no repentance.” I cannot put it better than the gospel of Luke (King James version natch). Even the most deluded of Euro loon (Charles Kennedy, after lunchtime?) must now accept that Greece, Spain and Portugal are bust and that Italy and France are heading that way. Not surprisingly the Euro is tanking, the dollar looks strong and the world seems to think that the Old World has a monopoly on insurmountable problems. It does not. The USA is in the same boat as Europe and that boat is called the Titanic.
Now I accept that Europe has its own particular issues. A fixed currency for uncompetitive economies is a killer (for them). A genetic aversion to hard work, addiction to welfare-ism and the need for regular fixes of industrial action ( i.e. inaction) across swathes of the Southern part of the continent post challenges that, in the current set-up, are insurmountable.
But the US also faces challenges. Some of those it has in common with Europe. I no more believe the stated NAV of most of the big American banks than I do that of Barclays. That is to say there is just bound to be a wave of non-performing loans, complex derivative exposure and off balance sheet nasties which will emerge at some point. As in Europe there is a profound disconnect between the ruling beltway elite and the population as a whole. But the common factor is the National balance sheet.
We seem almost to have forgotten that the US keeps on having to raise its debt ceiling in order to avoid its Government to grind to a halt. Neither of the two main protagonists in the November election appears to be offering the sort of changes which are need to address this issue. Okay, Obama always offers change but I think after four years we know that he couldn’t change a lightbulb without hiring an additional Federally funded liberal arts graduates and beltway insiders to do it for him.
Numbers you say? Where are your numbers? Well US Federal debt will end this year at circa $17 trillion. And of course there is quote a lot of Governmental debt at the sub Federal level given the devolved nature of US Government. Oh, and I forgot the unfunded Medicare and social security commitments it has for the future – that is another $60 trillion but that is a ponzi for the next generation so, in a spirit of generosity I shall ignore that one too. Let us just stock with $17 trillion. That sounds like a big number. It is. In fact it is more than 100% of GDP.
And now for some more bad news. C20% of that GDP is Government spending. C60% is consumer spending. The former is bust. The latter has, by historic standards, racked up a rather high debt to disposable income ratio and has in recent years not been saving at all. I think we might need to see a bit of an adjustment there. Another big chunk comes from Wall Street. All those bogus profits JP Morgan racked up on its London whale were indeed contributing to US GDP. Oh dear.
Now if we put this in context the US Debt to GDP measure is worse than that of France (85%). It is not far behind that of Italy (120%). The big difference is that in Europe there is at least talk of austerity (if not concrete evidence of Governments trying to spend less outside of Ireland and Spain). In the US it is still spend, spend, spend. Both Presidential candidates drape themselves in the flag and beat their chests as they boast of an Imperial military presence that sees 700 bases abroad that the US simply cannot afford to maintain. Last autumn we saw a Republican Congress and President hopey-change agree that they would agree in the future where to cut costs. The truth is that the only guy who actually put forward a programme that would have led to a better than balanced budget, the good Dr Paul, was dismissed as a kook for his ideas.
Americans would it seems, rather show patriotism by having their servicemen based where they are either not needed or not wanted or both across the world, and just pretend that the economy will grow enough to sort out the debt. Aha, the old canard “we will spend the proceeds of growth”. That old line. It is cobblers. To inject a rare dose of academic rigour into my work. A study by Harvard professor Kenneth Rogoff and Carmen Reinhart from the Peterson Institute shows that when public debt tops 90% of GDP it acts as a brake on growth. Their study of 44 countries, going back 200 years, concludes that it would be foolish to interpret today’s low borrowing costs as a green light for further debt. “Politicians everywhere like to argue that their country will expand its way out of debt, [but] our research suggests growth alone is rarely enough to achieve that with the debt levels we have today.” Well the Prof is bang on the money, or lack of it, with that one.
US spending during the past two decades has been almost entirely focused on Government and consumer spending, not on investment in capital goods by the private sector. I do not see that in Obama’s increasingly taxed and regulated world this is going to change. If I was running a US Corp and could open a new factor in Michigan or Mexico which would I choose. It is a no-brainer. And so structurally I have concerns about the ability of the US to grow its GDP at any great rate.
But it gets worse. As Ben Bernanke noted today there is a problem in Europe and it seems that this is affecting US growth. Cripes you don’t say. Ben, if I ever gave the impression that I thought you were a clueless fool who liked printing money to bail out the Wall Street banksters but had no grip on the real world, I apologise now. What an amazing piece of insight.
And so the US now faces pedestrian, at best, economic growth while continuing to run a vast budget deficit which means that Federal debt is going only one way, and fast. We talk about how the poor Froggies may go bust ( it is a will not an if in my book) and how Italy is already bruschetta well the US is in a worse mess than the former and is playing catch up with the spaghetti eaters. Of course it is too big to fail. Yeah right. Those nice Chinese will keep buying up ever more of its debt won’t they?
The Obama administration and Bernanke think that the answer to everything is to print more cash to hand over for another sugar rush on Wall Street. Short term, that means more mega bonuses for the banksters and – by creating illusory activity on the Street – adds to US GDP numbers. But in the end it can only debase the value of the currency. It does not create real jobs. That can only happen by Government doing and spending less. At some stage America needs to take some Greek/Spanish style medicine and recognise that its military presence must be scaled back.
It happens to all empires. They go bust in the end. Their currencies are debased. Rome, Britain and in due course the USA. It is always the same story. My guess is that until the election no US politician (bar the Saintly Dr Paul) will wish to discuss the real choices that America must make. My second guess is that after the election no real choices will be made. I remain a fundamental dollar bear and gold bull for that reason.
Have you seen the lastest edition of the economist? A big front page article all about how strong the US’s economy is.
Reminds me of the article they did called ‘drowning in oil’ where they predicted $5 oil just before it rocketed to over $100. These are the same brilliant people who told us that the erm was great and that we really should join the euro or risk being ‘left out’.
CHI
The Economist/FT always staffed by folk who realised that only thick xenophobes opposed the Euro etc. Almost a Toynbee rule on this one…
Thanks for the observation & validation of my thesis.
Tom Winnifrith
Economists remind me of weather forecasters – neither will stand up and say “I got it wrong!!”
Gary.
And weather forecasts have a better record of accuracy.. albeit low threshhold.
Thank you for your comment and for reading this blog
Best wishes
Tom Winnifrith