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Tuesday, July 12, 2011

Mercans Might Want To Take A Hard Look At Italy

Update: I am seized by the unholy urge to exercise very vigorously or scrub things or perhaps both. The precipitating factor was NFIB June. We moved into double digit negatives for general business conditions in six months. This is generally a sign that a recession is underway. In October and November of last year this number was at 8 and 16. In January and February it was at 10 and 9. Now, -11. End update.

This is a lesson for us. The end, when it comes, comes suddenly.

Italy appears to already be sunk. The 10-year yield yesterday reached close to 6%, which implies that Italy's economy would have to grow by about 5.5% to give it a chance to meet the additional interest tariff no matter how much the government spending is cut. That isn't going to happen. The auction brought 1 year yields up about 120 basis points from a month ago. (3.67%). Again, that implies that Italy cannot keep its public debt from growing as a percentage of GDP. In a couple of years it will be over 130%.

I think events are moving too fast for Europe to form up an intervention. Trading in Unicredit had to be suspended. Unfortunately the next round of Euro bank stress tests are due to be released in a couple of days. With the Irish debacle from the previous round quite fresh in the memory, the Italian results will seem like a cruel farce. With the markets deeply skeptical of some of the large Italian banks, Italian companies now will face financing problems without intervention.

The cure for this can only be a common European bond facility of immense size, and I doubt the political will or the time exists. So Italy will have to come up with the money (probably advanced from the ECB?) to keep its banks afloat this summer, but at the cost of losing plausible deniability regarding default.

Less than two months, folks, from start to finish. The only thing standing between the US and Italy's situation is that we just haven't build our public debt up to the mathematically impossible point, but our official plans are to do so within a decade.

It would seem wise to change our official plans. We cannot afford the health care reform package, and we can't afford to continue our current retirement programs.

The thing is, Europe as a whole is capable of extending enough credit to Italy to keep it rolling for a while, but that isn't possible for the US. So if we let ourselves go Italian, the result would be one quarter when suddenly the flow of money just stopped, and after that it would be very hard for companies to borrow, so the result would be an instant Depression.

Everyone's nursing their own grievances, and I am too. But recognizing what will happen if we don't change course is a necessity. The US is too big to fail gracefully, and US citizens will not be bailed out because the US is the largest economy in the world.

Italy is not in that bad a position if it decides to go back to the lira. Until the 2008 collapse, Italy had been running a primary surplus, which is the precondition for devaluing your debt without killing your country.

Since the implicit plan to deal with US public debt is devaluation, we need to move to a balanced budget, and we need to do so within a decade.

Now, if you set forth a credible plan to do so, you can afford to raise taxes on the wealthy somewhat (they can't cover the whole tariff). If you don't have a credible plan, just raising taxes on the wealthy makes the eventual crash far more vicious and destructive.

We have only ourselves to blame for this. We always knew the retirement financing scheme was bogus.

Comments:
We cannot afford the health care reform package, and we can't afford to continue our current retirement programs.

Back in 2000 we did not have our current debt but the combination of Bush tax cuts while going to war with two separate countries combined with outsourcing our manufacturing/jobs has been the primary debt drivers. We cannot have retirement/health care if this meme continues.
 
"... I am seized by the unholy urge to exercise very vigorously or scrub things or perhaps both ..."
===========================

Sadly, *my* unholy urges as regards the antics of Our Schmucks In Washington are much less temperate than yours... now where did I leave that dadgummed pitchfork?
 
You know if we weren't funding two wars and
backstopping the banks , we could have shored SS
up until demographics turned favorable. Might have
given people confidence to retire and opened up a
few careers for the younger crowd.

Sporkfed
 
"Less than two months, folks, from start to finish."

Once it starts I suspect it will play out even faster for the US, and what we'll get is another massive overnight change in the rules of the game driven by power players (without any sane consideration for what is best for the common citizen or the long term, and with no public discourse) much like when FDR closed the banks, defaulted on the dollar, and confiscated everyone's gold (after having run on the promise of protecting the gold-backed dollar). Perhaps that will be the when and how of the confiscation of 401Ks and IRAs. Most every politician will call it a necessary action, saying they had no other choice. But even that move will only buy a bit more time. Then crisis will be reached once again, drastic action will be taken again. And while I don't know exactly where that road leads, I'm pretty sure I'm not going to like it. I have wanted us to make immediate course corrections my entire adult life, but there have not been enough others calling for the same thing. And it seems even now there are far too few. So, crisis, here we come.


"we need to move to a balanced budget, and we need to do so within a decade"

Translation: This ship is going down.

As some of you may have noticed, a mad scramble for the golden lifeboats seems to have begun. But don't bother yourself with such nonsense. Just sit back and relax. Listen to the band playing on. Maybe rearrange a few deckchairs. The crew will surely right this ship before it's too late.
 
"if we weren't funding two wars"

Not that I am disagreeing one bit about how wasteful these wars are (never mind how immoral they are), but it's worth keeping in mind that the real reason we are in Iraq is dollar hegemony. Bush thought it would be a quick way to shore up the dollar (by preventing Iraq from requiring Euros for oil as Saddam wanted to do). Bush was just very wrong about the "quick" part. (Propping up fiat is also the likely primary cause for the actions in Libya -- Gaddafi was pushing for Africa to charge gold for its resources, and was bringing back the gold dinar. Also note the curiosity of the alleged rebels, in the middle of an alleged rebellion, starting up a central bank.)

The dollar being the mess of the sham that it is is going to continue to bring pain down upon us until it is somehow either fixed or replaced.


"Might have given people confidence to retire and opened up a few careers for the younger crowd."

That doesn't really accomplish anything. Wealth is created two ways -- production and trade. If we are to "do better" (be wealthier) then we need to produce more (and/or trade more). All else being equal, just transferring a career from one person to another doesn't accomplish that. Having both people working, though, does. We want an economic environment where older people *AND* younger people can *BOTH* work and produce as much wealth as they are willing and able.
 
MOM,

"I am seized by the unholy urge to exercise very vigorously or scrub things or perhaps both."

My word verification is satere.

I suspect it is "unholy" satire (i.e., satan's mouth to my ear).

Speaking of satere, I'm sure the economy will be fine once we emerge from the soft patch (of quicksand).
 
I understand wealth isnt created when a younger
Worker takes over for an older worker. We do however
Face the prospect of a generation who are under.employed
and are delayed in starting families . It's creating big
problems in Japan .

Sporkfed
 
Ron - You are entitled to your own opinion but not your own facts: the war spending and Bush tax cuts produced deficits between half and a quarter of Obama's, and Obama has been cutting expenditure on the wars below Bush's: it is the explosion of discretionary spending under Obama which has created $1 trillion plus deficits as far as the eye can see. Your man Barry is the one who saw the cliff and stepped on the gas. To eliminate the current deficit ALL tax brackets, not just the rich, would have to pay TWICE as much as they currently pay. To eliminate the deficit.

By the way, what do you think of Obama's decision, announced on CBS, that he will not pay Social Security checks on time, even though his own Treasury says there is enough cash to pay them. I don't know about you, but shouldn't Obama be impeached if he carries through on his threat?
 
"Face the prospect of a generation who are under.employed and are delayed in starting families . It's creating big problems in Japan."

That sounds more like a family problem than a national economic problem. If older people have more of the wealth and want grandkids, then they will just have to help their kids out. (That's how it's worked in one case in my family -- my sister could never have afforded to have any kids, much less the number she has, if my parents hadn't funded her "endeavors".)

Now if the older people have more of the wealth and *still* don't have enough wealth to fund grandkids, then you are in the case of needing more total wealth where simply transferring jobs doesn't help.

I guess the other option is they do have enough wealth to fund grandkids and they just don't want to. In that case, Japan goes empty and maybe China or Russia will take it over (assuming they don't mind the radiation).


"have to pay TWICE as much as they currently pay. To eliminate the deficit."

And that doesn't even touch the debt. Last year interest payments on the debt were $413B. And that was despite the Fed driving shorter term rates practically to zero. We're in deep trouble if rates are increased to battle inflation (interest payments balloon to massive levels as existing debt gets rolled over), and we're in deep trouble if rates are kept where they are (dollar gets driven into the ground, food and energy prices skyrocket even more). And our history on debt repayment is pretty clear -- our debt has increased every single year without fail since 1957. Not sure how much longer they can kick the can before the jig is up.

I think some people (Mark?) are expecting a replay of the 70s (rates driven up, inflation brought under control, commodities fall back down to sane prices), but I think our debt is just too large at this point for that to be a viable solution.
 
foo,

I think some people (Mark?) are expecting a replay of the 70s (rates driven up, inflation brought under control, commodities fall back down to sane prices), but I think our debt is just too large at this point for that to be a viable solution.

I am braced for 1970s conditions but that is not the outcome I expect. Like you, I do not think the Fed can choose the 1970s path. It would spiral out of control. I think this also explains why the long-term inflation expectations of TIPS vs. nominal treasuries are well anchored.

That said, I do think real yields will remain low into the distant future. That's my direct bet and I'm basing it on stagnant real growth and therefore a lack of money making investment alternatives.

If I truly felt that the 1970s would repeat then I would chose something other than TIPS to protect myself. Their inflation protection increasingly fails as inflation rises (due to the taxation of the inflationary gains). TIPS become nearly useless as an inflation hedge if we hyperinflate.

In summary, I am not betting on inflation. I am betting on low real yields (as were seen both in the inflationary 1970s and Japan's lack of inflation).

I said recently that if I had it all to do over again then I would have called myself Stagnationary Mark instead of Stagflationary Mark. That's a better description.
 
I would choose. I said chose. Oops.
 
How can fewer people due to a loss of household formation not lead to lower productivity in the long
term ? Not everyone parents can afford to subsidize
Their offspring.

Sporkfed
 
M.O.M.,

This is a lesson for us. The end, when it comes, comes suddenly.


Why is Italy the "lesson" for the U.S. rather than Japan?

"M.O.M might want to take a hard look at Japan!"

I could point out the flaws in your logic, but there's no point. Your eCONomic beliefs are religious in nature.
 
AngrySaver, remind me to never invite you to visit my house.

MOMA certainly doesn't need my help, but I'll add she didn't create the mess we're in, vent your spleen at those who did.

And, funny thing about religious beliefs, everyone has them whether they admit it or not. I respectfully submit, you should examine yours more closely.

Anon
 
I would say that older people are less able to help their kids with the housing problem right now. The one asset most households have is their house, which can't really be turned into funds right now. I guess it does give the kids a roof over their heads but that's about it. My stepson has three part time jobs right now and he's one of the lucky ones.
 
Concerned:

Clinton told Newt the same thing back in the 90's. Frankly I think the debt ceiling is the start of the 2012 election cycle and is heavily scripted on both sides, so I don't spend much time following it.
 
Why is Italy the "lesson" for the U.S. rather than Japan?

Can't both of them be lessons?

Lessons are not predictions.

The lesson is take an honest look at your problems or you will have an economic crisis. While I would say the U.S. is on a course closer to Japan demographically, from a productivity standpoint the U.S. is more like Italy.

No one can claim Japan has/had productivity problem - what they had was problem of creating so much leverage even their improving productivity could not keep up. The U.S. has a problem of increasing leverage and declining productivity. That's why I don't see how one can look at one or the other (Italy, Japan) but not both as lessons.
 
Angry Saver (who ain't these days? I nearly passed out when I saw the first stories about Bernanke's little congressional chat, and looked at the commodities result.)

Italy has an economy far more like ours at the moment - running a current account deficit, heavily biased toward consumption and services.

Therefore it is a much BETTER comparison to the US. None are perfect. Our demographics are much better than either Italy's or Japan's, which is one reason we really can afford to pay out on a lot of our retirement promises provided we correct in time.

Japan is nearly 50/50 production/consumption. It is unlike any other highly developed economy, which is how they got away with running their Debt/GDP ratio up over 200%. They have now run it up to the point where they have to default on their own population, but it hardly matters, because in the US we don't have the option.

Basically, they are earning so much they can afford it, and indeed most of their government debt is internal.

The reason why I think we should contemplate Italy is the suddenness of the confrontation with reality. For a while, banks will buy up Italy's sovereign debt to protect the status quo, but that will end quite soon, and when it does, the result will be worse than if the intervention had not occurred.

I don't really see how religion could come into it. It is true that I believe from religious principles that one should not lie about anything that is not an opinion (i.e. do I look fat in this?), but it seems to me that is really an ethical principle; I also believe in that principle without the aid of religion. I did before I was religious.
 
Ron - I suggest you look at Treasury Direct; Debt to the Penny.

As of the end of fiscal year 2000, total debt held by the public was 3.4 trillion. Interagency debt (like the retirement funds) totaled 2.27 trillion, for a total of 5.67 trillion.

As of 12/31/2007 (beginning of recession), debt held by the public was 5.14 trillion, Interagency was 4.09 trillion, for a total of 9.2 trillion. It is important to distinguish between the two, because the Interagency is debt we owe to ourselves (i.e. theoretical savings).

Therefore, during over six years, debt held by the public had increased by somewhat less than 1.7 trillion.

Then came the recession (the second on Bush's watch, and recessions do force running up debt), and from 2008-2011 (July 12th), debt held by the public has increased to 9.74 trillion. This is artificially suppressed by machinations because of the debt limit - it is really over 10 trillion.

So debt held by the public has increased about 5 trillion in 3 and 1/2 years. Some of that is being spent on the wars and whatever you may call these military bombing adventures. But most of it is being spent on either bailing out the banks or bailing out the victims of the recession, and in some cases that money has gone overseas.

There's also hidden debt not reflected in these numbers, like the built-up losses in the GSEs, so believe me, real debt held by the public has increased more than 5 trillion.

Interagency debt is currently 4.6 trillion. That hasn't changed much. Because we are running deficits in both the SS and Medicare trust funds, that amount won't build up much, if at all.

This is what happens when you try to reinflate a tire without fixing the holes in it first - the more you pump in the faster the air leaks out.

Ron, we spent our collective retirement savings trying to fix a financial bubble.

As to blame allocation, could we please be honest? When the Medicare program was initially passed, we knew it probably would run into troubles about now. We decided to ignore that. By the end of the 1980s we knew the program was busted. We ignored that.

We have known with vast certainty since the mid 1990s that SS was in long term trouble. From Clinton on, no Congress has been willing to address the program's failure. Instead, with Clinton we adopted the financial bubble solution. We were all gonna be so rich it just wouldn't matter!

But all of this pales in the face of racking up 5 (FIVE) TRILLION dollars in new debt in less than four years!!

That's what financial bubbles do. They destroy the real economy, and they destroy it for years. The longer you nurse them along, the deeper the ensuing collapse and recovery period.

So when we are passing out blame, we should not forget the Fed, because in many ways since Volcker, the Fed has been willing to keep the bubble in the air. Volcker forced an end to a regime in which the Fed had been nursing a sick economy along. It was brutally painful - an IMF-type intervention. Greenspan rather chose to blow up bubbles, and Bernanke doesn't seem to be able to tell the difference between a bubble economy and a real economy. As far as he is concerned, asset prices are the economy. He's about to get a real world lesson.
 
Concerned - I don't think Obama is going to follow through with that threat, because I think Congress would pass legislation to direct him to pay the checks.

There is apparently money to do so. After all, MOST of current benefits paid out are covered by benefits paid in. As far as I am concerned, just not to send out the checks is illegal.

I don't really want to talk much about Obama because some people hate him with a deep, abiding passion, and I think he is rather disgracing himself now, but it is ultimately futile to just sit here and rave about one president who isn't really that significant in the whole scheme of things.
 
Total public debt on Jan 20th 2001
was 5.6T on Jan 20 2009 it was 10.6T

Big numbers that look close to 5T in public debt during a period when we were fighting two wars and giving large tax breaks.
 
We have known with vast certainty since the mid 1990s that SS was in long term trouble.

We knew that at least as far back as the late 70's. One of the first thing done during Reagan's first term was taxing SocSec "income".
 
As far as I am concerned, just not to send out the checks is illegal.

It would be electoral suicide, too. Every senior who missed a check would come out and vote against Obama in 2012. If the old farts don't stay home he's in trouble.
 
Total public debt on Jan 20th 2001
was 5.6T on Jan 20 2009 it was 10.6T


So +5T over Bush's 8 years, versus +3.7T in Obama's 2 and a half years. Sounds more like Greece than Italy!
 
Yes, but Ron the huge majority of that is associated with the 2008 bailout and recession.

Everything has hurt. Bush was not financially responsible (although it is Congress' job, he never pressured Congress one iota!), but as I detailed in the comment above, from Dec 31, 2007 to currently, debt held by the public has increased by 5 trillion dollars.

From the end of September 2000 to the end of December, 2007, debt held by the public increased by a bit less than 1.7 trillion dollars.

It's not that Bush was fiscally responsible - it's just that the epic fiscal irresponsibility of blowing these big financial bubbles has created a wave of financial destruction that has overwhelmed our society.

Our fiscal position might be marginally better in the future if Bush had remained in power, because he wouldn't have pushed health care reform which is going to be utterly destructive. But I am pretty sure that if he had stil been president, our current debt held by the public would be within 500 billion of what it now is.

You do this, this is what you get. I'd prefer stopping now - Bernanke's trying to double down - but regardless, we have to deal with the debt and position we now have. It can't be wished away.

I dislike our current wars very much and I think our policy is very destructive, but obviously none of our opinions on that matter.

We got Bush II, cubed, in Obama. Everything he did wrong, Obama doubled, and then he tries for a an additional load of garbage.

The reality, however, is that it is our social spending that must be constrained. Massively.

The second recession is going to make that clear by the next State of the Union.
 
Charles - those are bad numbers.

You have to use debt held by the public, not the total. The Social Security fund is really "savings", not debt. It counts up our excess payments, same for the Medicare fund.

Interagency debt isn't debt - it's bookkeeping entries.
 
MoM,

I know they are bad numbers, I'm pointing out to Ron that two can play the selective endpoint game - the (bad) numbers for Bush look equally as damning if not moreso for Obama.
 
"How can fewer people due to a loss of household formation not lead to lower productivity in the long term ?"

One word: robots

I'm not just pulling an arbitrary solution out of the air here either. Robots *is* Japan's chosen answer to declining population. (I.e., they know their population is declining, and they don't seem to be planning on changing that, instead they plan on just dealing with it.) They are working on making robots that can take care of their elderly (among other things). Like their complete-fuel-cycle nuclear program, it's very ambitious and might not succeed, but it is their plan and they are throwing real resources at it.

(Of course "robots" is just one example of the more general category "efficiency increases" by which productivity can go up even as population declines.)

Also, note that lower total productivity is not necessarily harmful when you also have a smaller population. Falling per-capita productivity, on the other hand, will inevitably result in falling standard of living, so that's one thing you probably want to avoid. (E.g., MOM frequently talks about cost of energy -- and high energy input costs is one way to lower per-capita productivity and thereby decrease standard of living.)


"Not everyone parents can afford to subsidize Their offspring."

Not everyone should have kids/grandkids. (But this is getting into a whole other topic.)


"I could point out the flaws in your logic, but there's no point. Your eCONomic beliefs are religious in nature."

So you have some well laid-out reasoning that supports your claim, but you don't want to present it because MOM has "economic religion", which is another claim you make which is presumably supported by some other bit of well laid-out reasoning, which you also don't provide. Boy, I'm convinced!
 
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