The most memorable scene from the movie Boiler Room is when the
character of Ben Afleck tells the room full of wannabe brokers to "Act As If"
(and in the tangent regarding male genitalia, the head of the IMF would
have been wise to take the advice instead of opening his fly and
disproving it). Who would have thought that a few short years later, it
would be none other than insolvent countries taking this advice: specifically,
America acting as if it wasn't insolvent, and Greece acting as if it was
beyond saving. The irony, as William Buckler observes in his latest
edition of the Privateer, is that while US debt continues to trade (if
no longer be accepted) as the "Rock of Gibraltar" and Greek paper is
trading with a certainty of bankruptcy, it is Greece that has taken
proactive steps in taxing and spending policy, while the US has merely
retrenched its profligate ways, and while much political theater takes
place, nothing ever really changes. For some of the more perverse
consequences of this bizarro world inversion, read below.
“Let’s Pretend” Has Run Amok, from Bill Buckler
In Greece, which has been subject to the not so tender ministrations of the US debt ratings agencies and the global “risk” markets for the past eighteen months, government two-year rates soared above 25 percent this week. The rate for two-year US Treasury paper is hovering just above the 0.50 percent level. Plug these two numbers into the “algorithms” by which computers control most financial trading these days and the result is obvious. The Greek government will be seen as a financial pariah and treated accordingly. The US government will be seen as the fiscal Rock of Gibraltar. But even the US would pale in comparison to Japan, where two-year rates on government debt are below 0.20 percent.
In terms of funded debt, Japan has by far the biggest government debt to GDP ratio in the world. Greece is ahead of the US in that respect, but not by much. On the “markets”, Greek rates indicate a HUGE perceived risk in holding their paper. US and Japanese rates indicate no risk whatsoever.
Of the three nations in question here, only one has made any discernible change in their taxing and spending policies over recent years. That nation is Greece, the European pariah. As a reward, anyone in Greece who is NOT a debtor is sitting pretty, pulling in a HUGE return on investment. The plight of genuine savers in the US and Japan is horrible to contemplate. There is no return on savings whatsoever in either nation. In the US in particular, rates for savers are NEGATIVE to an extent never before seen. Up until the Bin Laden-induced rebound of the US Dollar, Americans were losing quickly in terms of international purchasing power and watching REAL price rises outstrip the “earnings” on their savings by HUGE multiples. Everyone “knows” that in the international financial scheme of things, the US (and Japan) are too big to fail while Greece is not. As a result, anyone in the US or Japan who produces more than he consumes and saves the difference is being skinned alive while his Greek counterpart is reaping an interest rate bonanza. The real risks are not being taken by Greek investors, they are being taken by US and Japanese investors desperate to offset their inability to earn a rate of return from savings.
All this to pretend that US (and Japanese) full faith and credit can still be relied on. The damage mounts.