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Tuesday, May 04, 2010

A Couple Of Things

I was looking at the extremely strong coverage for Treasury auctions this week.

It's not really a surprise, given the wretched situation in Europe. Which will keep giving and giving. For example, the Spanish banks haven't begun to declare their losses yet. Their titular balance sheets have nothing to do with their actual balance sheets. The Austrians are just beginning to work out their problems now. And some of the companies that were bailed out before are going to need a new infusion of cash or guarantees.

Looked at one way, this is helping the US. Looked at another way, it is a fatal snare. It will allow policy makers to pretend that we don't need to correct course for far too long.

In Asia, there are both inflationary pressures and some growth concerns. The most interesting thing about the current Euro crisis is that as the value of the Euro slowly drops, inflation pressures in many European countries may mount, which should constrain demand. So it's not great for Asia either.

If energy prices fall enough, the US could bull through to sustained growth this year, although it wouldn't be fast growth, and it could easily be completely choked off by circumstances and bad government policy.

Italy now becomes of much more importance. Here's a blog for you on the Italian economy!

As the money becomes tighter, it's worth while noting that negotiations are afoot to amend (as in lower) incentive payments for German and Spanish solar. Italy was doing a lot of the same thing, and I am waiting to see what happens in Italy. As the blog notes, Italy does not currently have much structural growth capacity, and it does have very high public debt. They are quietly drifting toward disaster, and the pace may pick up right about now.

In the meantime, Sarkozy's attempts at reform in France are undoubtedly going to be boosted by the situation. It is not clear if the voters will go along with him, though. An interesting article:
But few issues are as sensitive in a region where the right to retire at a decent age, and retire well, is considered almost an inalienable social right. For many here, it's one of the defining elements of their identity as Europeans, part of what they feel makes them different — more reasonable, more humane — from overworked, overstressed Americans.
Well. Germany already ratcheted its retirement age to 67, just like the US. Unfortunately, all these other countries are going to have to modify their programs too. The reason has nothing to do with politics - it's the result of birth control and declining worker/retiree ratios!

Now I realize that reading BIS (Bank of International Settlements) publications is not for everyone, but I did check through my links and pull out this relatively short (26 pages, pdf) BIS working paper on the topic of government debt in the developed countries. If I remember correctly, this paper is from a presentation at a Mumbai conference in February of this year, so give the authors some credit:
Today, interest rates are exceptionally low and the growth outlook for advanced economies is modest at best. This leads us to conclude that the question is when markets will start putting pressure on governments, not if. When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that authorities are going to issue to finance their extravagant ways?
...
we note that, in our view, an important part of any fiscal consolidation programme is measures to reduce future liabilities such as an increase in the retirement age.6.
There is a lot of comparative data in this paper, so it's worth reading. I'll be coming back to this one, so don't think you can escape.


Comments:
MaxedOutMama, you rock! Yet another great post - spot-on and pithy. A joy to read. Why oh why can't we have a better blogosphere populated with the likes of you? I have downloaded the BIS paper to do my homework now. Keep up the great work - it is much appreciated!
 
It will allow policy makers to pretend that we don't need to correct course for far too long.

Not unlike the 70's.

There was plenty of denial at the US federal level in the 70's and Europe was far worse. The state and local situation was a completely different matter - and when New York City begged the feds for a bailout and Ford said "Drop Dead", they got the message.

The Feds will only get the message when the states and locals beat on the door. It'll take the "wrong" one (politically) to beat the loudest. I'm thinking "Arizona" or "Florida".
 
James - thanks for reading the paper!

Charles - I think the comeuppance is really the health care bill. The states literally can't afford to carry it out.

Imagine the angst that will result when the state employees find the federal legislation eliminating their jobs.
 
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