Howard Marks On Why USA Is Not Greece (Yet)

Oaktree Capital's Chairman Howard Marks went on a rather more politically-positioned rant in his latest missive (pdf here) but one section caught our eye more than others given the current imbroglio:


Via Howard Marks:

The First Order Of Business

What do you think of when you hear the word "Greece"?

  • An uncompetitive, low-growth economy,
  • for years, a higher credit rating than it deserved,
  • the resultant ability to borrow money it shouldn't have been able to, at interest rates that were unjustifiably low,
  • excessive public spending,
  • generous benefit promises that it can't fulfill given the realities and, as a result,
  • soaring debt and deficits.
  • Consequently, the need to cut spending and increase taxes, and
  • mandated austerity and deleveraging, with very negative implications for economic growth.

Now ask yourself what you think of when you hear the words "United States." Certainly the facts aren't the same: our economy is the world's greatest (although not what it used to be), and we can print the world's reserve currency, which Greece certainly can't. But there are similarities. The situation in the U.S. isn't a repeat of Greece's but, as Mark Twain would have said, "it does rhyme."

The truth is that the U.S. has pressing fiscal problems, stretching as far as the eye can see:

  • in the short-term, the 'fiscal cliff,' in which already-mandated tax increases and spending cuts have the potential to take 4% off of GDP if nothing is done about them within the next six weeks,
  • in the medium-term, trillion-dollar deficits unless there's radical improvement, and
  • in the long-term, entitlement promises that absolutely cannot be met. (With millions of Baby Boomers entering their senior years and living longer, we cannot afford the pensions and healthcare benefits that have been promised. The math is inescapable. If these programs are left unchanged, Social Security benefits will grow inexorably, and spending on healthcare has the potential to escalate without limitation.)

The bottom line is that if we don't want to be Greece, we can't act like Greece. Something has to be done... and soon. Every year in which we add another trillion dollars to the national debt (and tens of billions to the annual interest bill) - and every year the excessive entitlement promises are allowed to compound - makes it harder to solve the problem.


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