Friday , 21 June 2024

Can the U.S. Expect the ‘Greek Tragedy’ to ‘Play’ Out in Its Own ‘Theater’? (+2K Views)

The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008 – but U.S. government debt is no more safe than Pearl Harbor was in 1941. Words: 609

In further edited excerpts from the original article* Niall Ferguson ( goes on to say:

U.S. Will Never Again Have a Balanced Budget
According to the White House’s new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two year’s time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.

U.S. Must Tighten Fiscal Policy by 8.8% of GDP
The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were:
1-2. Japan/UK: 13% of GDP
3-5. Greece/Spain/Ireland: 9%
6? Step forward America: 8.8%

Higher Interest Rates Coming
Explosions of public debt hurt economies in the following ways:
1. rising fears of default and/or currency depreciation ahead of actual inflation push up real interest rates.
2. higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted as is the case in most western economies, not least the U.S.

U.S. Savings Rate Insufficient
Although the U.S. household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields:
1. purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and
2. reserve accumulation by the Chinese monetary authorities.

Interest Payments to Soar
The Fed is now phasing out the purchase of Treasuries and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $1,500 billion that implies up to $300 billion of extra interest payments — and you get up there pretty quickly with the average maturity of the debt now below 50 months.

The Obama administration’s new budget blithely assumes real GDP growth of 3.6 per cent over the next five years, with inflation averaging 1.4 per cent but with rising real rates, growth might well be lower. Under those circumstances, interest payments could soar as a share of federal revenue — from a tenth to a fifth to a quarter.

Moody’s Investors Service has warned that the triple A credit rating of the U.S. should not be taken for granted. That warning recalls Larry Summers’ killer question (posed before he returned to government):

“How long can the world’s biggest borrower remain the world’s biggest power?”


Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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One comment

  1. Lorimer,

    That damn Niall Ferguson stole my Greek theme. He used the drama theme to hook his comments on and also basically said what I did.

    This pleases me immensely because I respect him and his writing.

    Too bad my article didn’t hit the internet before his.