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Confirmed: U.S. Fiscal Woe Is Worse Than Greece
By Dian L. Chu, Economic Forecasts & Opinions
Reading the annual Long Term Budget Outlook by the Congressional Budget Office (CBO) has become an increasingly depressing experience in recent years. This year seems even more so than ever.
The latest projection puts the federal debt rising to 62% of the nation’s Gross Domestic Product (GDP) by the end of the year (from 40% pre-crisis), the highest percentage since just after World War. (See Graph)
Despite the gloomy projections, many economists seem to agree that a Greek style debt crisis is unlikely to take place in the U.S. due to the size of the economy, the single currency structure and dollar prestige.
After all, Greek debt totals 120% of GDP--twice the US figure--plus a comparison of the long-term bond yield, seem to suggest that the U.S. is in much better fiscal shape.
Or do they?
In a Financial Times op-ed dated July 25, Laurence Kotlikoff, economics professor at Boston University, contends due to the “labeling problem”--governments can describe receipts and payments in any way they like--we are essentially “in a fiscal wonderland of measurement without meaning.”
Kotlikoff believes a better benchmark of fiscal fitness is the fiscal gap, or the present value difference between all future expenditures and receipts. His calculations reveal Greece future expenditure at 11.5% of the value of future GDP, after incorporating the new austerity measures.
The US figure, based on the CBO projections--12.2%--is worse than that of Greece, but not by too much.
However, Kotlikoff says the U.S. is in much worse shape than the 12.2% figure suggests, because the CBO’s projections assume “a 7.2% of GDP belt-tightening by 2020,” with "highly speculative” assumptions, such as a substantial rise in tax receipts and wage growth.
A separate analysis by the New York Times also put the U.S. debt--measured by medium term deficit as a percentage of GDP--higher than that of Greece. (See chart) Furthermore, in a roundabout way, Kotlikoff and Da Gong, the largest credit rating agency in China, seem to be in agreement as to the fiscal position of the United States; although many have dismissed Da Gong’s objectivity when it downgraded the U.S. from AAA to AA.
Will America have a Greek style debt crisis? Probably not, given the country’s resources and resilience.
However, it is a matter of political will to make tough choices between strategic vs. tactical spending and taking necessary measures to put the fiscal house in order.
With the current bond market willing to overlook debt for an economic recovery, tactical spending should take priority in order to give more immediate boost to jobs and to sustain a tepid recovery. Cramming strategic spending during a recession, as with the first stimulus, most likely will only saddle the nation with more debt while impeding growth and recovery.
Meanwhile, the current trajectory would suggest a different kind of debt crisis could manifest sooner or later, and over-confidence, a "Too-Big-To-Fail” mentality some of the nation's leaders seem to have adopted, will only lead to a dangerous path of no return.
Dian L. Chu, July 26, 2010
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Her premise that Federal debt held by the public is equivalent to the total acknowledged debt is incorrect. Debt owed to the Social Security Agency is real, even if it is not available to trade. Similarly, oil in the Strategic Petroleum Reserve is real, as is gold in the vaults of countries, even if it is classified as not available for sale. Total Federal debt (on budget, ignoring Fannie/Freddie) etc is already about 1X GDP.
When you are the World's Reserve currency and own the printing presses you can do anything you like.
Gimp,
And how much you want to bet, the RESERVE status, is GONE....and very soon.
Where do you think our Rating will be then,and the USDX valuations?.
LOL..........I predict 20/30.Down from 82+.
Got Bread?
The US has become like a rock star. It runs up debt on drugs, hookers, fast cars and big houses. The gov't equivalent is pointless wars, banksters, pointless consumer spending and a massive housing bubble. One day the money will run out and he becomes homeless.
But at least I like to hear the rock star on stage. Wish I could say the same for my congressman.
This propaganda is strictly for the shpeople. When cities, states, companies, and Joe Sixpack can no longer service their debt it will be game over. Oh I forgot the US government.
No worry this information will never be reported on the financial rags.
as long as stupid idiots keep on comparing US gov defict w/ FANTOM GDP..
the situation will get worse..
the only and right way is compare fedaral gov recepits and outlays..
thats it...
this year receipts are going to be a bit ove 2 trln $, outlays 3.6-3.7 trkn $
thus budget deficit 1.6/2 *100 == 80%...
i dont know about greece, btu in japan for example its even worse..
its 100%.. Japanese gov will print 1 yen for each 1 yen in taxes ..
yen is a joke..
alex
alex,
"Japanese gov will print 1 yen for each 1 yen in taxes ..
yen is a joke.."
The Treasury is printing a $1.00 that cost's US a $1.60.
$.60 loss per dollar printed..............
Now that's a joke.
Yup - debt to GDP is mythical. It's deficit to cash flow.
Yes, we will have a Greek style debt crisis. There's no way to avoid some soft of default - entitlements, inflation, debt repudiation. Your choice. Could be followed by riot, civil unrest, or war. I think at some point we will default on our debt to China in some sort of act of war.
Wonder what would happen if you added all the muni debt/spending to our balance sheet/income statement. And all those costly mortgage guarantees.
Most likely scenario, the U.S. will sell Taiwan and South Korea to China. And they'll sell Europe to the oil sheiks too.
I bet they'll sell Arizona to China as well.
After reading the FT article Tim scratched his head quizzically and said "Ben, can you make anything out of this? It's all Greek to me!"
Perhaps Greece will arrange for us to get an emergency loan from the EMF.
Zorba the American
ironic how TBTF is a curse word when talking about banks, yet its the only way the US government will avoid ending up like Greece
That's like saying a supernova is a reasonable method for avoiding a nova.
Meanwhile, I'll note that shit blows up either way.
Alls I'm saying is the American consumer better not recognize the hypocrisy if we want to avoid any magnitude of novae
EURO buying support mentioned since June continues and further upside is expected.
http://stockmarket618.wordpress.com
"--we are essentially “in a fiscal wonderland of measurement without meaning.” ".
we avoid the qualitative analysis at our own peril. is it just too ugly
to look at?
Why should we belive the projections of the Congressional Budget Office (CBO)? Where they right in 1995, or 2000, or 2005. Are they smarter now ?
Species8472
I guess it all depends on which fictions one chooses to accept as reality.
http://www.theonion.com/articles/recessionplagued-nation-demands-new-bub...
http://www.theonion.com/articles/white-house-jester-beheaded-for-making-...
my second favorite website. On the Jester page, there's a link to : "kid ready to start play dating again"
Gotta love the Onion. Some humor to start my day - Thanks!