The Fiscal Cliff

[evilwebby]

Your points re debt levels and market sentiment are correct, but to compare the US and Greece is a bit unrealistic insofar that the world economy needs, (currently!), a vibrant US economy. It doesnt need a Greek one.

Sure, currently the US borrows to pay maturing debt notes & interest payments, but until the main buyers of new debt issues dont need the US economy, (ie, China), the cycle will continue.

When it stops, or more likely slows, then stand back from the touch paper!

A massive part of US, (and most Western Governments) problem, is welfare & old age provision caused, in the main, by the massive change in demographics since WW2. This problem/cost will only last for another 30 years or so, which is not that long.

Why does the world need the US, if all they do is overconsume at the expense of everyone else?
The US gets the world's stuff; what does the world get in return? Paper Dollars, which will never been redeemable.

An analogy would be a group of people shipwrecked on an island. Under our current model the Chinaman does the fishing, the Japanese guy collects the firewood, the Taiwan guy builds the shelter.. and the American gets to eat the dinner. Based on our current system, we would take a look at this and say "look! This economic system depends on the American! without him none of these other poor islanders would have any jobs!"

That's how screwed up the current system is, and it is a relic of a monetary system that was put together when the US was the world's richest country because they produced far more than they consumed and exchanged the rest for gold. Today it is the exact opposite; the US has gone from the world's largest creditor to the world's largest debtor nation.

I agree that demographics are also an increasing problem - why do you think it will only last 30 years? The ongoing costs of healthcare and pensions will only grow.

 

[roydo]

Why does the world need the US, if all they do is overconsume at the expense of everyone else?
The US gets the world's stuff; what does the world get in return? Paper Dollars, which will never been redeemable.

An analogy would be a group of people shipwrecked on an island. Under our current model the Chinaman does the fishing, the Japanese guy collects the firewood, the Taiwan guy builds the shelter.. and the American gets to eat the dinner. Based on our current system, we would take a look at this and say "look! This economic system depends on the American! without him none of these other poor islanders would have any jobs!"

That's how screwed up the current system is, and it is a relic of a monetary system that was put together when the US was the world's richest country because they produced far more than they consumed and exchanged the rest for gold. Today it is the exact opposite; the US has gone from the world's largest creditor to the world's largest debtor nation.

I agree that demographics are also an increasing problem - why do you think it will only last 30 years? The ongoing costs of healthcare and pensions will only grow.

I like your analogies!

The world needs the US to make and buy a huge amount of "stuff". The world also needs the US to be in a position to repay its debts; not tomorrow, but over a 30-40 years time frame. That is what currently happens. The UK only repaid our final loan installment back to the US, ironically, for WW2 loans they made to us last year. Most current debt issues are over similar periods.

The demographic issue is massive. The baby boomers were the largest ever bubble of population in the Western world. Their purchasing power changed consumerism and economics drastically. (What were teenagers called before 1955?) Now they are ageing, and they are becoming a cost to economies. That cost will steadily reduce over 30 years.

By then, a similar demographic change will be effecting Eastern/Asian economies, and they will want Western goods. I hope.

Still scary stuff in the US, but they must think of years to solve it, not just months.

 

[pfim]

Comparing the US to Greece in any manner is hyperbolic, yes. Greece was able to borrow at low rates because investors wrongly assumed that all sovereign debt within the EU held the same risk.

 

[roydo]

Comparing the US to Greece in any manner is hyperbolic, yes. Greece was able to borrow at low rates because investors wrongly assumed that all sovereign debt within the EU held the same risk.

Yep. Idiots, the lot of them. They only had to cast an eye in your direction to see hew to conduct fiscal union correctly between states.

1. Create a central bank/economic policy.
2. Name & issue currency to member states.
3. Allow member states some independence re rules & laws & budgets to make up for loss of total fiscal control.
4. Call the resulting outcome The United States of America/Europe.

 

[peteblue]

Good analogy.

Acutally in fairness, I think it's not quite like that; the US is like a household so you should include the private sector too: the Government is like the overspending wife with the wild credit card, while the private sector is the husband who is collapsing under the weight of trying to fund her spending spree.

US Total GDP is $15trn and debt is $14trn, so debt to GDP is approaching 100%, and the debt is continuing to grow at $1trn a year - about 7-8%.

Greece imploded when debt hit 120%. Within 2-3 years, the US will be right there where Greece was. How much more rope will the markets lend the US (and everyone else)? No one knows the answer to that.

The real crisis is coming, there's nothing anyone can do about it.

Yep, the USA is screwed. The Chinese will assume the US position on the world stage. All the top dogs are replaced at some point..........

 

[Brennan]

The entire world is screwed until we stop relying on a monetary system where everything people own is created out of debt.

 

[Deleted member 28206]

The entire world is screwed until we stop relying on a monetary system where everything people own is created out of debt.

 

[pfim]

Yep. Idiots, the lot of them. They only had to cast an eye in your direction to see hew to conduct fiscal union correctly between states.

1. Create a central bank/economic policy.
2. Name & issue currency to member states.
3. Allow member states some independence re rules & laws & budgets to make up for loss of total fiscal control.
4. Call the resulting outcome The United States of America/Europe.

The Eurozone has no central fiscal policy. You're also ignoring the political issues that created the two unions.

 

[roydo]

The Eurozone has no central fiscal policy. You're also ignoring the political issues that created the two unions.

Yeah, I know. That is why the currency union cannot work. And that is why it does work in the US. Not exactly the same I grant you, but pretty close. The political issues that led to the EU were fine, designed to prevent WW3 etc etc, but they ignored the economic realities of currency union when creating the Euro. The US showed how it should be done.

Hence, they were/are idiots.

 

[johnnydawg68]

I like your analogies!

The world needs the US to make and buy a huge amount of "stuff". The world also needs the US to be in a position to repay its debts; not tomorrow, but over a 30-40 years time frame. That is what currently happens. The UK only repaid our final loan installment back to the US, ironically, for WW2 loans they made to us last year. Most current debt issues are over similar periods.

The demographic issue is massive. The baby boomers were the largest ever bubble of population in the Western world. Their purchasing power changed consumerism and economics drastically. (What were teenagers called before 1955?) Now they are ageing, and they are becoming a cost to economies. That cost will steadily reduce over 30 years.

By then, a similar demographic change will be effecting Eastern/Asian economies, and they will want Western goods. I hope.

Still scary stuff in the US, but they must think of years to solve it, not just months.

You're spot on about the demographics. It is exacerbated by a dropping birth rate. Which means immigration is the key to plugging the hole. We have to let more people in of working age to sustain the baby boom generation. You're also right that it's a "temporary" problem.

 

[johnnydawg68]

It totally isn't hyperbole, mate.

I guess we have different definitions of what paying your debts means. To me, paying your debts means what it actually says - ie, paying off what you owe. What you are talking about is just servicing the current debt. That's like taking out an interest only-mortgage, re-mortgaging each year for an extra 8%, and not having any plan to pay back the principle. Is that sustainable?

QE doesn't work at all; they've been trying to find the right stimulus programme in Japan for 20 years, and they're still trying.

Don't believe any propaganda about falling unemployment, either: the (US) labor participation rate is at a 30yr low and tells a much different story.

Where do jobs come from? Real productive jobs (not penpushing government jobs) come about because of under-consumption and savings, which frees capital resources for future growth, but you can't have savings when interest rates are zero. Historically there is a very strong positive correlation between growth and savings rates. So to have real job growth they have to raise interest rates to make savings worthwhile, but that will collapse the economy in the short term- but it's only after a collapse that the economy can truely restructure and have real growth.

Paying your debt means paying what you owe, and that includes servicing the debt. It can also mean paying the principle. If you remember, we were doing that under Clinton. A huge tax cut, two wars and Medicare Prescription bill that were put on the credit card is what has caused this problem. Taxes need to go up (they are a bit), the military budget needs to be scaled back tremendously, and then allow the economy to keep recovering, which will provide more revenue.

These are not insurmountable problems.

 

[johnnydawg68]

Yep, the USA is screwed. The Chinese will assume the US position on the world stage. All the top dogs are replaced at some point..........

Um. No. China has it's own growth problems. They built their economy on exports but as costs have risen, you're seeing less and less outsourcing. China is a major player, but they have a loooooong way to go before we start talking about overtaking the US. It won't happen in my lifetime.

 

[roydo]

You're spot on about the demographics. It is exacerbated by a dropping birth rate. Which means immigration is the key to plugging the hole. We have to let more people in of working age to sustain the baby boom generation. You're also right that it's a "temporary" problem.

Or make sure we/you can sell enough Land Rovers/Levis/I Phones/Marlboroughs etc etc to the new wave of Indian & Chinese. So far, we are doing OK at that. Now if some sort of wealth distribution starts off in the ME & Africa.........phew!

 

[roydo]

Um. No. China has it's own growth problems. They built their economy on exports but as costs have risen, you're seeing less and less outsourcing. China is a major player, but they have a loooooong way to go before we start talking about overtaking the US. It won't happen in my lifetime.

Correct, and future political problems IMO. The last 20 years of devotion to the Party and all that crap is starting to go away. There is already an active political opposition, albeit small, but unless the corruption at the top is controlled, and the great unwashed do not start to see their share of the spoils of growth, change will happen. Always does.

 

[pfim]

China has its own issues of market liberalization, state owned enterprises, and non-performing loans which would make any proponent of bailouts blush. It will be decades before they can overcome this, if they can. It's corruption and cronyism at its highest degree.