Debt and Deficit: When Graphics Speak Louder Than Words

EconMatters's picture

By EconMatters

Concern about the European sovereign debt crisis has moved from Greece, to Portugal when Moody's downgraded the country to junk status last week. Now Italy has become the new victim as worries of a debt crisis contagion, as Italy, euro zone's third largest economy, is the next weak link in the region (See Chart).

The Wall Street Journal reported that default insurance costs for Italy, Portugal, Ireland and Greece have all hit record highs Monday, July 11.  The crisis only got worse Tue. July 12, when Ireland also got axed to junk by Moody's.


Source: New York Times

According to NYT, the interest on Italy's 10-year bond spiked to a record 5.67%. While that is still far below what Greece is paying nowadays, analysts say Italy will have serious problems if its borrowing costs exceed 6%.

If markets were worried about banks' exposure to Greece, check out these numbers cited by NYT:

"European banks have total claims and potential exposures of 998.7 billion euros to Italy, more than six times the 162.4 billion euro exposure they have to Greece, according to Barclays Capital. European banks have 774 billion euros of exposure to Spain and 534 billion euros of exposure to Ireland.

In the United States, banks are also more exposed to Italy than to any other euro zone country, to the tune of 269 billion euros, according to Barclays. American banks' next biggest exposure is to Spain, with total claims estimated at 179 billion euros."

In addition to a debt load of 120% of its GDP--the second highest in Europe--Italy's predicament could also be partly attributed to the political power struggle between Prime Minister Silvio Berlusconi and his finance minister, Giulio Tremonti, as the political dispute is threatening the country's austerity and debt management efforts.

If the Italian sings a good political opera, the United States gets an Emmy for its political soap.

Deadline is fastly approaching for the United States.  If the Congress fails to reach a deal in 10 days in order to meet the Aug. 2 deadline to lift the nation's debt ceiling, the U.S. could face probably its biggest calamity in history--a sovereign default.

Congressional Republicans, who insist that any deal could include no tax hikes, have rejected President Obama's $4 trillion deal.  At the same time, Democrats also oppose Obama's plans to cut government aid to seniors and low-income Americans.

This chart below from Bloomberg illustrates the great divide between the nation's spending and income.




The dotted line shows federal spending as a percentage of GDP since World War II. The solid line shows income taxes as a percentage of GDP are at 14.9%, the lowest since 1950. The average in the last 60 years has been closer to 18%, based on data compiled by Bloomberg.

What does this chart tell you? It makes logical sense that in order to narrow the spending and income gap, both lines would need to move towards the middle. That means raising taxes AND cut spending; otherwise, it will be just twice as difficult to put the government budget on the right track.

One analyst remarked that “Italy is too big to fail,” while the other noted “If Italy goes, it's no longer a domino.  It's a brick!”  

If the descriptions of "Too Big To Fail" and "Brick" applies to Italy, think of the U.S. as "Too Big To Bail out" (since "Too Big To Fail" did get bailed out) and "an asteroid the size of Texas" (as in the 1998 movie Armageddon), which would be probably end up to be an understatement for the world. 

Further Reading:
Gold and Dollar Pop on Euro Debt Crisis
Cracks Beneath: China, Greece, US and Derivatives

EconMatters, July 12, 2011 | Facebook Page | Twitter | Post Alert | Kindle

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walküre's picture

The "Eurozone" aka EU will simply increase its size and population by virtue of allowing more countries to join and sooner than anticipated.

All those new countries have little or no debt and will roll out the welcome mat for the central bankers and all other banker vermin.

The US can print and try to shove the US Dollar reserve status down everyone's throat at gunpoint.

The EU can expand land mass, increase population and increase GDP and reduce debt ratios.

EU wins.


blindman's picture

here some related links.
The most important thing you’ll read all day
Posted on July 13, 2011 by maxkeiser
bernanke speaks gold to the moon. watch your ass in the presence
of so much hot air and rocket fuel.
Dead Money …
Posted on June 27, 2011 by steve from virginia
The Fate of Gold & Oil
"We are due for a correction – It’s Just Time. The months ahead are September and November in particular for turning points. What we have to pay close attention to is the “hype” that comes out. If the Investment Bankers are looking to force a liquidation to make a bang-up trade for the year since things have been quiet, the news will be spun to support their agenda. This is part of the game. When they wanted all the little guys in for 1980, they made the Hunts a household name. That was the setup. The little guy buys thinking he is running with the big dogs. The real big dogs stay well hidden in the bushes and will NEVER step into the limelight."
good luck

Zero Govt's picture

most economists argue a Govt debt to GDP ratio of over 100% means your toast ...that was the marker in the Great Depression ..i'd argue Govts are basically insovent at 50% in a boom time (aka 2001-2007) because come recession, or worse Depression, tax revenues take a major nose-dive and sucking higher taxes (productive wealth) out of the economy to service the debt servicing shortfall ensures economic recovery takes even longer when you should be sitting on budget surpluses from growth years before you hit recessions

..but Govt is even dumber than that.. it indebts itself in good times and digs even deeper debt holes even faster in recessions... the true morons of economics 

docj's picture

Congressional Republicans... have rejected President Obama's $4 trillion deal.

And precisely what "deal" is that? Where, precisely, is the plan that accompanies this "deal"?

What does this chart tell you? It makes logical sense that in order to narrow the spending and income gap, both lines would need to move towards the middle.

Bullshit. What it tells me is that, under Red, Blue and mixed congresses and both Red and Blue Administrations with a wide variety if tax policies, the Fed.Gov has since the 50's about 17-18 percent of whatever they calculate as GDP to spend. So it actually makes logical sense that the spending line has to move to meet that historical line rather than trying to bend 50+ years of history to fit the beast.

Zero Govt's picture

Yep.. only this D-Day doesn't end with landing on the beaches and a happy ending.. more like crashing on the beaches and the bodies washed out to sea for shark meat

GOSPLAN HERO's picture

Warning!  Ben Bernanke has a technology called a money printing press.

Get gold and silver today.


sasebo's picture

I'm in - 75% of everything.

TaxSlave's picture

Bullshit.  GDP is a gamed number, they've been changing the calculation for it constantly to put a rosy face on it.  It's like standing on quicksand.  It now counts a bunch of government spending and paper moneyprinting and 'banking services' as production.  It's a Big Fat Lie all by itself.  That's the only possible way to come up with a stupid chart that makes it look as if our taxes are lower.  It's not even a funny joke.

The bald assertion that taxes have to be raised and everything will then be back to dream-time is pure, unadulterated sewage.

Dream time is over.  What is happening is a collapse of the fiat-currency / government growth bubble.

How about a chart showing what percentage of the population are actually employed making actual physical products?  All the rest is overhead.  It tells you all you need to know.  Game the numbers all you want, base them on whatever you want. 

The bottom line is predatory behavior.  When it's no longer worthwhile to make things, it's not just the economy that is doomed.  The civilization is doomed.  When parasites and predators can no longer live comfortably by skimming off the productive efforts of the producers, they will consume the assets used for that production.  The consumption of assets (next year's seed corn) is almost complete.

The fix is in.  Read 'em and weep.  You've destroyed our productive sector and sold off the productive capacity.  You think trying to squeeze us a little more will fix everything?  Ha!  Wait until the people that you feed off have nothing left to lose.  Hope you have a good place to hide.

G. Marx's picture

I guess the Europeans didn't have enough 'regulation'?

luigi's picture

Oh, on the contrary, we have had plenty of it according to the "stick and carrot" principle: stick on the head and carrot up the *ss...

Version 7's picture

France 82%? Germany 83%? Something doesn't meet the smell test.

Sudden Debt's picture

Yes, but Belgium is in much better condition then the other bad countries because our politicians say so.


luigi's picture

No, it is in much better condition because you have no politicians ruling for more than a year :)

We should try here in Italy as well...

Mussolim's picture

+1 Gigi u made me laugh!

W il governo balneare!

luigi's picture

Let's zoom out and re-start from the very basics.

Total Eurozone debt is somewhere near 88%, total deficit being somewhere near 6% of GDP

Total US debt is around 97% and deficit around 15% of GDP

This doesn't take in account that Eurozone has a lot of margin to cut on deficit if it would slash on welfare spendig lowering the social care standards to US levels.

For sure, Europe is a juicer lemon to squeeze for the Wall Street based marauders, but that we also have to endure this arrogant bashing on how we Europeans dealt like grasshopers versus the US ants is really adding insult to pain... and we are allies...

Sudden Debt's picture

but 2012 will be the turning year where all suddenly turn out for the best. No cure needed.

at least that's how the movie would end if Disney made it...




BigDuke6's picture

Gee... is this bullish for gold?

sasebo's picture

How does going straight up at 1586 sound?