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Monday, March 04, 2013


I have been deeply frustrated by the lack of realism in the US, but unfortunately it's not just confined to the US. And since the US is currently hysterical about the asteroid Sequestra's devastating impact square on the DC metro area, it might be well to contemplate Italy's situation.

Take this Bloomberg article on Italy's political and fiscal predicament:
Rehn, the EU’s budget enforcer, said the bloc has no leeway to depart from its course of reining in spending and debt. 

“We’re not going to solve our growth problems by piling new debt on the old,” Rehn told Spiegel in an interview. 
No kidding, but that doesn't mean you are going to solve the problem by continuing to pretend that the debt is payable, either. Europe is repeating the Greek debacle with Italy, with, haha, the same results. Cue Einstein.

Here's the situation. Italy debt-to-GDP ratio at the end of 2011 was 120%. Italy continued and ramped up its efforts to deal with the situation, including raising taxes and cutting some spending. Istat (Italy's statistics agency) disclosed an official 127% debt-to-GDP ratio at the end of 2012

So, regardless of the mindless-but-unified rhetoric of the European leaders, the fact is that Italy is accumulating new debt, despite the fact that Italy is truly doing the austerity dance.Italy will also close out 2013 with a higher debt-to-GDP ratio. 

Here are some graphs from Istat:

You can't have any doubt that there is a carry-on economic drag from that big rise in unemployment, and it is obvious that when your total of employed persons starts dropping like this, tax revenues must decline also. Bank of Italy projects 2013 GDP will shrink a net 1%, and Confindustria (whose figures I use), now predicts -1.1%.

Now, very simple math will tell you that if Italy is paying interest on 127% of GDP, at 4% average, the total interest on original debt will be 5% of GDP. This means that if GDP were stable (not declining), in order not to increase the debt, Italy would have to run a primary surplus (government receipts - government spending less interest on debt) of 5%. With, mind you, unemployment heading toward 12%????

Italy's GDP shrank 2.4% in 2012, so Confindustria was too optimistic in December. It's completely plausible that Italy's GDP will shrink more than 1% in 2013. If you attempt to raise taxes, it is certain that it will. Italy's current budget shortfall (receipts less expenditures including interest) was 3% in 2012. That matches EU guidelines, but it means that the debt-to-GDP ratio keeps increasing even without recession. Furthermore, it's a good guess that tax revenues were disappointing later in the year. 

So now we have an optimistic forecast that Italy will end 2013 with around 130% debt-to-GDP ratio. These numbers cannot go in any favorable direction. 

Now it is clear why the Grillinis are trying to fight the system, because the plan is to fail. If Italy continues on its path and the Greek solution is applied, the write-offs will be forced on government debt held by the private sector, which means that banks and some pensions will take the hit.

Obviously under these circumstances Italy's private domestic investment continues to fall. Who could invest in a setting like this? It's very difficult. 

Italy's demographics are not favorable, and now they will be worsened by emigration of the young: For example, Italy has more 65-69 year olds than it has 20-24 year olds. The number of 60-64 year olds is 3.6 million. The number of 15-19 year olds is 2.9 million. The mere idea that Italy will be chipping away at this mountain of debt ten years from now is mind-bogglingly ludicrous.

The only feasible way for Italy not to default on its debt is to make the old farts into soup and distribute the soup for free to the younger population. I suspect that's not going to happen. 

So it is screamingly obvious that Italy is going to default on its debt. It would be just about impossible for it not to default if it had favorable demographics and it sold off a lot of state assets in order to cut the debt load. As it is, it is not possible. 

The question really being negotiated is how Italy will default on its debt. Will it leave the Euro and pay debt in a degraded new lira? If it does, it will default on a lot of its debt, and have import problems. Will it get a European bailout by the means of an investment pool that cuts Italy's average interest to about 2%? That would cut default risks to oh, say, about 60%. And where does Europe get the money? 

The US is screaming about a sequestration pinprick when it ought to be willing to do WHATEVER IT TAKES not to let our debt-to-GDP ratio get above 80%. That would have to include large cuts in spending and large increases in upper middle-class taxation, but it would mean that 20 years down the line old farts wouldn't find themselves starving. 

Instead, we argue about the asteroid Sequestra. 

The official US debt-to-GDP (for issued debt) is about 73%. We have already monetized a lot of the Big O deficit financing, and as I have repeatedly pointed out, there is a downside to monetizing debt. You raise domestic needs prices, you make your population poor by confiscating their money, and you slowly degrade the ability of the central bank to negotiate future financial shocks.

The US is playing a game that will end in some sudden monetary cataclysm, but it is not clear which one. If we continue on without correcting course, we could shift into high inflation or we could shift into deflation, or we could do both (a sudden spike in inflation followed by persistent deflation). 

Whatever we do, we will not get stability on our current trajectory.

This is all obviously good for stocks. Just look and see. Bad news and the market goes up. The amount of money the Fed provides the banks is huge compare to the amount on the margin of stock trading. Their job is to not let the market correct very much before the next rush to the all time highs.

There will be no adjusting the heading we are on. Special interest are too strong. Americans are as stupid and corrupt as Europeans. And as ignorant voluntarily so with a lot of help from the liberal media, Hollywood, middle school teachers, high school teachers and college professors. Plan for it.

For starters, how long before the brutal austerity of medical cuts take place? The rate of growth of Federal medical spending is probably going to double in 6 or 7 years which means $1.7 trillion by then. That ain’t going to happen. So what will you do when the cuts come and do you think it will be in 3 years or maybe just after the next presidential election? What will it be like? No hip and knee replacements – old people hobbling around like when I was a teenager?

So you mean all that Hopey Changey Obamanomics was all politics and no economic common sense?

Well I am shocked, just shocked I tell you.
The "brutal austerity" of any real cuts simply won't come, not as long as there's a printing press.

At least not voluntarily.

They'll stretch that rubber band until it breaks... and it will break.

p.s.: Love that sequester math video by Senator Kerry Bentivolio.

Take away 9 zeros and they're squealing about cutting $85 out of $3800.
Or $850 out of $38,000 which is exactly what happen to working Americans January 1st with FICA.
I'm still waiting for your post on Modern Monetary Theory, MOM. The dems and Obama seem to believe it is true and all will be well. Otherwise how do we explain their actions?

Need more money? Just crank up the old digital printing press. Got too much debt? Just reduce it by erasing the digits on the Fed computer. No harm, no foul. {:-)

Could it all be true?? After all, these are highly educated and (I think ) intelligent people.

Let us know. Will MMT save us? Inquiring minds want to know.
The sequester cuts amount to one stinkin' month of Helicopter Ben's QE(ternity).

A total restructuring of the tax code is needed.
When wealth disparity is at the levels it is now,
raising taxes on the upper middle class and
cutting the safety net will not solve the budget
deficit or rebuilt the economy. As much as commenters
here will scream, David Stockman was right, we need
a wealth tax in addition to fundemental changes in
the Social Contract.
The first step on that, Sporkfed, is to eliminate the tax exemption for municipal bonds.
I agree with WSJ. The biggest tax shelters are not being addressed, and the last thing you want to do is have very wealthy people pull capital out of GPDI and put it into tax shelters feeding pensions.

Pain, pain, nothing but pain.
Jimmy, I'll try. Maybe from another direction?

I have trouble writing about MMT without descending into impenetrable rhetoric. But yet it seems so obvious to me. I search and search for a way to clearly convey the problems, but I don't find it.

And I have very little time at the moment!
David Stockman was right, we need
a wealth tax in addition to fundemental changes in
the Social Contract.


We DON'T need a wealth tax, we need to STOP bailing out the wealthy (and everybody else) when they make malinvestments. You risk your money and lose sometimes.

THAT is the fundamental change in the social contract that happened against everyone else's will - the wealthy made bad loans and the Fed continues to print money and gives it to them to cover up their bad bets. That is how the wealth disparity begins and how it widens. This is the same mechanism that has caused public sector employees to pass the private sector in earnings.

Bernanke claims to be doing what Milton Friedman prescribed, but what he is actually doing is almost the exact same thing that was done during the Great Depression. During the depression, banks failed and the depositors lost their money - that money didn't vaporize - it went to cover banker salaries and other accounts payable and it ran out. Friedman said he would print money to make the depositors whole but the failed banks would be gone. Bernanke is doing the exact opposite - he is printing money to give to the banks so they don't fail which is not the same thing.

A wealth tax is such a monumentally stupid idea in this context that anyone who proposes it doesn't know how the current system works and therefore is unqualified to suggest a solution. A wealth tax is going to completely screw the lower classes because the Fed WILL NOT STOP printing money and handing it to the wealthy - the Fed will merely print more to give directly to the wealthy to pay their increased tax.
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