Guest Post: Houston, We've Got A (US) Problem

Tyler Durden's picture

Via Dr. Constantin Gurdgiev of True Economics blog,

2013's biggest Grey Swan might be not China's slowdown or Euro area's continued debt crisis (although both are pretty much still on the books, although the former is less likely than the latter). It might not even be the Japanese economic implosion (albeit Japan is sick beyond any repair)... oh, no... the real Grey Swan of 2013 might be the markets starting to take a closer look at the US.

This might sound bizarre during the weekend following Friday, when the VIX index collapsed 39.1% - more than in any other trading day in its history, and when the US markets have ended the first week of the year with total gains almost equivalent to what some are projecting for the entire 2013... and yet... as some would say: "Houston, we've got a problem!"

The problem is best illustrated in the following three sets of chart, all comparing US fiscal performance to the peers.

Structural Deficits:



As the two charts above highlight, the US Government structural deficits are massive. Since 2011, these are shallower than those of Japan (and Japan's figures in charts above are likely to become even worse following the latest Government appointment and their commitment to debase/in-debt the Japanese economy out of existence) but they are the worse in the entire G7 group save for Japan. More ominously:

  • The IMF is predicting the structural deficit to worsen once again starting in 2015
  • The above projections by the IMF do not reflect the disastrous consequences of the 'Fiscal Cliff' deal struck on December 31, 2012 (see here).
  • In 2013, US structural deficit is projected to be around 5.49% of GDP against the G7 average of 3.04%
  • In 2010-2017, according to the IMF projections, the US cumulated structural deficits will add up to 44.84% of GDP - against Japan's 58.53% and the G7 average of 24.97%. For 2013-2017, the same figures are: US 21.43%, Japan 33.31% and G7 average 10.48%. In other words, things are going to get worse in the US compared to G7 average in 2013-2017 than they were in 2010-2012. They will be worse still in Japan, but everyone expects Japan to remain the sickest member of G7, so there is little surprise or repricing that can be expected before the US risks are repriced.

Primary Deficits:



Ugly picture for the US vis G7 counterparts continues with primary deficits as well. Per above:

  • The US is the second weakest link in G7 in terms of primary deficits
  • In 2010-2017 period, the US is expected to generate accumulated primary deficits amounting to 37.65% of GDP and this is against Japan's 52.42%, but G7 average of 15.99%. In the period from 2013 though 2017, the US accumulated primary deficits are expected to come in at 14.21% of GDP against the G7 average of 3.54% of GDP and Japan's 25.73% of GDP. Once again, relative to G7 average, the US performance is expected to worsen in 2013-2017 compared to 2010-2012.


A table to summarize the above two sets of charts on a longer time horizon scale:


Government Debt:



The US is positioned as the third weakest G7 economy in terms of levels of Government debt it carries - after Japan and Italy. However, this analysis neglects the fact that according to the IMF projections, the US debt situation is expected to continue worsening through 2016 (when US debt is expected to peak at 114.19% of GDP), while Italian situation is expected to improve from 2013 peak of 127.85% of GDP into 2017. Similarly, compared to G7 average, the US debt dynamics post-2013 are unpleasantly convergent to the higher G7 average (driven by Japan's debt levels).

Stripping out Japan from debt analysis:

  • In 2001, US debt to GDP ratio stood at 11.83 ppt below G7 (ex-Japan) average. By 2012 this number has reversed into US debt overshoot of G7 average by 10.06 ppt. By 2017 the same overshoot is expected to rise to 19.57 ppt.
Table below summarizes the long-range view of the charts above:
To summarize the above evidence, the US debt levels are not sustainable in the long run, even though current growth (above debt financing costs) and funding costs (exceptionally low yields on Government bonds and the printing press effect on these yields) are delivering short-term sustainability. However, as shown above, the US primary deficit ius huge and not abating fast enough. This implies debt to GDP ratio will be rising into 2016, if not after. Which, in turn, implies rising susceptibility of the US to risk-repricing in the markets.
It is worth contrasting the US case with that of Italy and Japan. In Italy's case, there is significant surplus on the primary balance and overall deficit due to high cost of funding even higher debt, compounded by economic growth well below the cost of funding the state debt pile. In Japan - there are severe problems across all parameters: high primary deficits, growth well below the cost of debt funding, and debt pile so large that structural deficits are alarming.
All of which means that all three economies can be severely tested by the markets. As long as global economic environment remains that of subdued economic activity, so that risk aversion remains high and monetary policies remain extremely accommodative, the US is out of the investors' crosshairs and Italy is in. Should these environments change, all bets are off for the US - at least in the medium- to longer-term.

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max2205's picture

Didn't you notice the can was kicked last week....

kaiserhoff's picture

Right about the States, but the vix will always collapse after a big up day, and go nuts on a big down day. 

You have to be careful about that chart porn.

Xibalba's picture

In the future - Zim dollars will be used as collateral for US dollars 

unrulian's picture

WOw look at Canada...we're only super fucked....however you're completely Super Fucked

caShOnlY's picture

When your sole existance as a nation is dependent on the US consuming your products, I'd say your super completely fucked beyond all hope.  And when you decide to use your secret "tar sands" weapon, you'll see the 3rd Marine division already got there.   There is a benefit to NAFTA after all, great friends and trading partners!!!

Snakeeyes's picture

Why do you think they are talking about trillion dollar platium coins? THE GAME IS ALMOST OVER! We are living on hyper spending and hyper debt.

Mercedes's picture

I don't follow.  Canada has the lowest structural deficits and has actually reduced their debt as a % of GDP. 

Nage42's picture

Well that's fine, but the entire Canadian market is "dirty pegged" to the USD via NAFTA clusterfsck so when the USSA Titanic finally realizes that the water it was taking on has started to soak the bed linens, then the little dingy chained to the back of it (Canada) will prolly already be getting mulched up by the propellor... what a depressing and yet strangely accurate image...



stocktivity's picture

It's all Bullshit anyway

Seer's picture

Nothing like dropping acid and looking at colorful squiggly lines! (always looking for value!)

mt paul's picture

what will amerika do

when some homeless guy

recycles the can 

they've been kicking ...

BoNeSxxx's picture

Howdy nmewn. Happy New Year to you.  Been a while...

Cheers to a memorable 2013 :-)

Getting Old Sucks's picture

Get a nickle and make a profit of about 1.5 cents.  Do it now.

Seer's picture

"what will amerika do"

Same as it always does, arrests the guy and blames him for all the ills.

ball-and-chain's picture

How long have we been listening to this shit?

The collapse isn't coming.

We're in for endless Japanese-style recession.

Nuclear winter is already here.

Seer's picture

How long do I have to listen to people claim that it isn't coming?

You're paying attention to shit written on paper! (staring at shit-stained toilet paper?)

Japan has been able to coast because the rest of the world has continued to feed it PHYSICAL resources.  We're now at the point of realizing that it's all paper and that now it's a shift toward PHYSICAL (concentrating on commodities, which Japan has none).

No, Japan is going to crack -SOON, and when it does That will trip up US Treasuries, which in turn will hit the big switch on the US economy (as the debt will start sucking in all available capital).

If you're tired of hearing this shit then perhaps you ought not be hanging out here?

BTW - I'm not interested in reading your blog. If you have an ager problem then maybe you should look in to anger management...

Rustysilver's picture

Everything was fixed last week. No news here.

Bluntly Put's picture

That's right, if all else fails we can mint up new 1 ounce, platinum $1012  coins.

EnslavethechildrenforBen's picture

We could kick $Trillion Dollar Platinum beer cans down the road...

Never One Roach's picture

when Timmy sells The Tuna everything will be fixed.

unrulian's picture

From hell's heart I stab at thee; for hate's sake I spit my last breath at thee. Ye damned Trillion dollar Tuna.

ebworthen's picture

Problem being that U.S. markets are propped by the FED.

There seems to be no limit to how far they will go to prop the banks, bankers, and Wall Street.

I wouldn't doubt they are buying equities and doing currency swaps off the books; and simply giving "money" (binary digits) to their banking rulers such as J.P. Morgan Chase, Wells Fargo, and Citi.

It would not be a large leap after rewarding the oligarchs while punishing individuals who work and save - as the government at large ignores the rule-of-law and allows blatant thieves such as Corzine to escape justice and impose fines rather than jail time for MERS, Libor, subsuming bondholder rights, and other open crimes against the individual.

TrustWho's picture

Central bank printing has never been a long term strategy and every nation who printed thought they were addressing a short term problem that always required more once started.

All Fed board members should be treated as criminals as their bank friends.

BoNeSxxx's picture

The printing can continue as long as oil is traded for dollars...

When that changes, so does life as Americans know it.

Knowing this should help explain why our military is spening so much time in desert camo...

TerminalDebt's picture

That is a dangerously wrong belief.

This causes the US to export inflation to all consumers of oil, but they all perish together.


BoNeSxxx's picture

LoL... yea, I thought the danger was implied.  You are correct.

It is ABSOLUTLEY the reason the FED has the CTRL+ALT+P option.  16 Trillion is beyond fucktard when you really comprehend how much debt that is... it's more than the US could EVER hope to repay. Sooooo... Petrodollar to the rescue.

In a FAIR resource based economy, evey inch of Saudi would look like Dubai.

But, it doesn't... same reason every square inch of America doesn't look like Newport RI.  

Lords and peasants, oligarchs and cattle, winners and losers.  It's the system we were born into and will most likely die in.

Getting Old Sucks's picture

What inflation?  The Bernank says there's no inflation.  I shop for chop meat now insted of steak.  Same same right?  Opps, chop meat just went up 2 bucks a pound.  Could he be fibbing to us?  Nah, they would never do that.  I must be looking at something wrong.  HEY BEN, YOU WOULDN"T BE KIDDING US NOW, WOULD YOU? 


garcam123's picture

This is revealing to me.  I don't own PMs so I have to eat common food.

Did I already tell the group about boxed mac and cheese.  It used to be 3 for a dollar, now it's $ .95 per box.

I expect the food riots aren't far off.

We need to start killing bankers.

Seer's picture

"Opps, chop meat just went up 2 bucks a pound."

And then they'll point out that steak is down! (which it will be, but it'll still be too expensive for most)

I can afford $4/lb.  Steak goes up to $7/lb.  The data shifts to reporting on stew meat at $3/lb.  Stew meat goes up to $5/lb and steak drops to $6/lb.  Since the inflation shows up under stew meat they now start reporting that prices have dropped because steak has dropped (which, is STILL not AFFORDABLE, but that's not the point they care about)!

Seer's picture

I'd even go so far as to make it more generalized by stating that the USD is only good as long as PHYSICAL is traded for it.  The USD has gone entirely VIRTUAL now.

During the GW Bush administration the push was to secure distribution channels for oil (oil being THE key resource- it is, after all, POWER!).  The next necessary step was to keep the skids greased such that oil could move; the "skids" being the banking system (enter the Obama administration); the "grease" being the various bailouts to shore up the books (which are supposed to legitimize operations- we can now look in to them and proclaim that all is well!).

sessinpo's picture

ebworthen: "Problem being that U.S. markets are propped by the FED."


Actually, the problem being is that the public (often ignorant) allows it to happen.

In other words, that specific problem, as you call it, is only there because it is ALLOWED to be there by the public. And they will go as far as they can as long as they are ALLOWED.


Another way to interpret what I say is: They power is with the FED because the the public ALLOWS them to have that power. The real power is with the people, but the people is either to ignorant or lazy to take that responsibility. Another way to interpret this thought, which I have expressed before is: The Fed and the FRB are symptoms of a societal problem (liberalism). You would have less bloated government and not such liberal ideas of centralized planning if we did not have such a liberal ignorant population.


Quite frankly, I'm sick of the same old games as most of us at ZH are. But I'm not going to lay the blame on these criminals when we all know who they are and what they are doing. But the public ALLOWS them to get away with it. That is the down fall of western society. Despite all that one individual might do to combat it, you are going against the grain, fighting millions of sheeple. All you can do it try to protect yourself, which the Federal government is in the process of making harder to do.

ArkansasAngie's picture

The steeple don't know

The propaganda served by MSM is very effective

Cover-up after cover-up

secret_sam's picture

      The Fed and the FRB are symptoms of a societal problem (liberalism). You would have less bloated government and not such liberal ideas of centralized planning if we did not have such a liberal ignorant population.

That's false and stupid.

"Liberalism" does not assert the virtues of centrally-planned economies OR of totalitarian State-power.

klockwerks's picture

You have just made his point.  I think you are one of the ignorant liberals he spoke of and your statement just proved it. DUH

ebworthen's picture

Liberalism and Conservatism are two sinpes running about the grounds of the Capitol.

TPTB make people believe they are members of one or the other, so they spend their time vociferating on radio and in the streets, while both Demicans and Republicrats - who purport to be one or the other or in-between - act and vote to maintain the kleptoligarchy.

The snipe hunting is a waste of your time; tearing down the non-functional status-quo establishment through violent revolution is the only way; though the sheeple will need to be starving and have their T.V.'s and Internets shut off before that happens.

secret_sam's picture

There ARE real meanings to the concepts, but most folks aren't interested.  I only point out the obvious stuff now and again. 

It's worth calling out bullshit that's deliberately intended to deceive people about history and to maintain the current tribal jingoism.

Joe moneybags's picture

You made a very good point Secret Sam, one a little too nuanced for the knee jerk crowd here to consider. 

secret_sam's picture

It's not exactly "nuanced."  It just demonstrates the current gulf between understanding and opinion.  No biggie.

Seer's picture

Blaming the messengers ain't going to solve anything.  It's the MESSAGE (premise) that's the problem, which is: "perpetual growth on a finite planet is necessary."

The Ponzi pre-dates all the messengers.

This is the Titanic.  Expecting/wishing everyone to run to the same side of the ship is highly problematic.  Most here are expending energy in order to climb to the high side, the high side only being possible because the bulk of people are on one side (which causes it to be lower).  And when you realize that this is what we're doing and that it's little different than the strategy taken by TPTB (who are the messengers), well...

TrustWho's picture

...and add the American states debts to the federal total.....uh oh!

apberusdisvet's picture

The consistent ramping up of the police state is certainly indicative that TPTB are expecting an event to occur.  Whether it will be a false flag situation or a true economic event is open to question.........but it is definitely coming.

Seer's picture

The "event" has been occurring for quite some time.  It has to do with resource shortages.  And given that ALL WARS ARE ABOUT RESOURCES it follows that war(s) are coming.  In the US people are increasingly less gullible about wanting to "spread democracy," so war with external entities is becoming harder to muster up; this starts tilting things toward INTERNAL war (the ramping up of divisional mechanisms such as racism and ideological thought appears to be ramping in this direction).

tawse57's picture

I have given up looking for black swans and in being a bear.

It seems that nothing will allow these markets to dropp 500 points let alone 2,000 or 3,000 points.

I think that as we have now got to the point where we are talking about grey swans shows just how desperate us bears have got.

They are printing to infinity.

Dick Buttkiss's picture

They are printing to infinity.

Which is why it is insane to be bullish, as infinity, by definition, cannot be reached, and the economy must therefore collapse at some point.

So get ready -- -- and otherwise go about your business, remembering, as always, that

The state can kiss my ass.

tawse57's picture

Yes, it will collapse at some point... but us bears have always expecting it to be next week, next month, next year... and we have been thinking this for years now.

Yes, it will collapse some time but that might be several years and several thousand up points on the DOW away.

We underestimated printing. We should admit it.

cossack55's picture

Some also underestimated a TOTALLY corrupt gubmint and a TOTALLY corrupt media.  Add the printing and you got the Mother Of All Trifectas (MOAT).

Dick Buttkiss's picture

Never underestimate the Fed/USG's ability to extend and pretend, meaning stopping at nothing to sustain the unstainable, never mind that the end will be all the worse for doing so.

Expect expanded war abroad, therefore, to change the subject FDR-style, with martial law at the ready, including FEMA camps, to quell the masses as the endgame plays itself out.

And fuck the stock market. It's a computer-run casino for whom retail investors are digital mince meat.  

And besides, you've got more important things to do.