Tuesday, January 31, 2012

Zero Hour: Portugal

This isn't totally a dead blog, but with the Eurozone going back and forth around bailout policies intended to avert bankrupsies of member nations, but only prolonging the problem, it is hard to report factual data regarding government bond sales when much larger economies profess their willingness to continue with bailouts. It is a similar pattern we see in the U.S. with the Federal Government bailing out state mispending.

So I've been using interests rates of 25% as indicators that selling government bonds is an untenable way for a government to make money, and by that standard, Portugal has recently crossed the line for its 3 year bonds (source pending until I can find something more official, but a quick Google search will show 2-year bonds spiking over 20%, and 10 year bond spiking over 18%; 20% is still untenable in my opinion).

As I've written before, probably the rest of Europe can support deficit spending in Greece, Ireland, and Portugal, at least for awhile. If Spain and Italy follow, at that point there will be a shift in the economic organization of the Eurozone.

Monday, July 18, 2011

Zero Hour: Ireland

Time to call zero hour for Ireland, the second of the PIIGS nations to fall, now with 2-year bonds selling for 23%, and skyrocketing drastically. Even 10 year bonds are reaching 20% for Greece and Ireland.

Of the remaining PIIGS nations, after Greece and Ireland, Spanish and Italian government bonds are still selling in the reasonable range of 5%, and Portuguese bonds are not listed in the quoted article, but my guess is are somewhere in the middle.

The Germans and French can keep bailing out Greece alone, and if push comes to shove can probably do it for both Ireland and Greece, in order to keep the Euro afloat. It is unfortunate that German and French taxpayers would have to do that, or accept the inflationary consequences of such policies, but they can. We will have to see where it stops. Maybe they will add Portugal to the pile in order to keep the Euro alive.

But if zero hour happens to Spain and Italy, that is end-game, and I see no solution to that other than massive inflation of the Euro, or widespread default on European government debt.

Sunday, May 8, 2011

Zero Hour: Greece

I'm calling it. When government bonds are selling at 25%, particularly in a very low investment yield environment, it's Zero Hour for Greece. 25% goes beyond junk bonds into loan shark territory. If you say, "I'm paying 18% on my credit cards and I'm doing fine," I'm going to doubt that your credit card debt exceeds your annual income, unless you are a student and the banks know they have you once you get a job. Greek government debt is well above its GDP, and vastly exceeds tax collections.

Greece has long been on schedule to be the first westernized country, and one of the first on the planet, to hit Zero Hour. With excessive government subsidies and payouts to Unions, and extremely poor tax collections, it now depends on bailouts from the Eurozone for basic sustenance. Greece is the first of Europes "PIIGS" nations (Portugal, Ireland, Italy, Greece, and Spain) to fall. German and French bailouts are keeping it afloat, but these are likely to dry up soon. Any way you look at it, Greece's unsustainability of government spending is upon the terminal endpoint.

I've been meaning to comment on the gradually worsening situation of the PIIGS nations, but anytime a meaningful event has occurred regarding their credit situation, the Eurozone has stepped in with austerity packages and bailout measures, reducing the situation to almost a non-event, and simply delaying the need for major spending adjustments and spreading the pain of uncontrolled spending to healthier economies.

We see a similar phenomenon in the U.S. with state mispending and the Federal Government accumulating massive levels of public debt to compensate.

UPDATE [5/9/11]: Looks like S&P agrees.

Monday, April 18, 2011

T*Bux 2010

T*Bux is a term I coined and have been calculating for the past 2 years, which is: the per capita amount each income tax payer in the U.S. owes on one trillion dollars of federal government debt.

The number I have for tax returns in 2010 is 141 million. So T*Bux (2010) is: $1 trillion/141 million = $7092.

I have two different figures for returns in 2009 (132 million and 144 million), so I'll have to figure out what the inconsistencies mean. Before I was using the smaller figure, so I cannot compare this year with prior years. Sometimes IRS data can be confusing.

A rule of thumb, variations in figures notwithstanding, is that for every trillion in government expenditures, taxpayers owe around $7000 per person. for a total federal government debt of over $14 trillion, that's would be $100,000 each. For bank bailouts or national health care packages that run just under a $trillion a pop, that would be somewhere around $6000 per tax filer.

Now, what was down quite a bit in 2010, my initial look at the data is indicating--is tax revenues, which are at $2.16 trillion, though this IRS sheet suggests it might be even lower. That is down from $2.3T last year, and $2.5T as a general running average.

The big news today was that the outlook of the AAA credit rating of the Federal Government was downgraded from "stable" to "negative." That riled the stock market a little. My guess is it will recover tomorrow.

The bottom line is: with increasing federal debt and declining federal revenues, in 2010 zero hour drew a little closer.

Thursday, January 27, 2011

Japan's Footsteps

Today, S&P cut Japan's credit rating for the first time in 9 years, down to AA-.

Following WWII, Japan enjoyed abundant growth through the 1970s, rising to a fever pitch during the 80's, but beginning in 1990 has suffered economic decline, even during times when consumer spending was immense and the world economy favored Japan as much as one could hope. Japan's industries are still highly competitive and successful, and they continue to produce some of the best cars and electronics in the world. But there was an unspoken counterbalance to Japan's success, which was hardly reported on at the time, nor in recent news either.

In the 80's, while the world was heaping praise over Japan's economy, with ongoing predictions that it was set to become the next world economic superpower, there was an elephant in the room: Japanese growth went hand-in-hand with massive government debt. Earning a million dollars in sales is good, but not if you have to borrow two million dollars to cover production costs. Even those who knew about Japan's borrowing at the time might have viewed it as sensible infrastructure spending that would one day result in healthy net profits. But that is not how it played out, or if it did, it is Japanese industry who now enjoys the benefits, while the government and people are saddled with debt.

The entire Japanese economy has been stuck in a protracted recession since around 1990, and compounding the problem of earlier spending, the Japanese government succumbed to Keynesian policies of additional government spending projects in futile, unsustainable, and ultimately fruitless attempts to stimulate their economy. Today, Japan's debt situation is worse than Greece's (who has been facing civil unrest over their credit issues) with a whopping 200% public debt to GDP ratio, which is second in the world bested only by Zimbabwe. For as bad as U.S. mispending and debt are, we are closer to 75% debt-to-GDP, which is comparable to the better European economies like Germany.

From the CIA world factbook: Japan's GDP is $4.3T dollars, and public debt is 196% of that, which would be $8.5T. Tax Revenues are pretty robust at $1.8T (around 75% of the U.S. government's net income; consider Japan's GDP and population are both about a third of ours). Government spending is $2.3T.

I would say tax revenues like that are outrageous, but apparently the Japanese are okay with it. For years Japan has maintained a zero interest rate policy with quantitative easing, similar to ours, or rather the inspiration for ours, so their treasury bonds have been cheap. Even if government debt averages 5%, which is probably an overestimate, yearly interest payments would be $420B which sits easily within Japan's annual income. In fact, their national-debt-to-tax-revenue ratio isn't that far from what we have in the U.S., with the main difference being per capita taxes are way higher in Japan.

So, it is definitely not panic time for Japan, and the numbers don't even look terribly concerning, so I don't fully understand this recent downgrading of their credit rating, unless fewer tax revenues are forecast due to Japan's aging demographics.

I guess the point is: Japan offers evidence for the failure of Keynesian policies. Best the U.S. not follow their lead. Another point: China's situation today is not greatly different than Japan's back in the 80's.

Friday, December 3, 2010

Public Debt Recap

When George Bush took office in 2000, the U.S. public debt—the amount the Federal Government owes in treasury bonds—was $3.4 trillion. When George Bush left office, it was $5.8 trillion. For all of his misspending, it pales compared to our current situation. Today, as of this writing, with Obama holding office for a mere 2 years, the public debt stands at $9.2 trillion.

The average tax payer owes around $7000 for each trillion dollars of government spending, so Obama has spent over $20,000 for each tax paying citizen in two years. Do we have $20,000 per head worth of a better country? I guess that is a personal decision each citizen needs to make.

This is what the government owes. It is different than the gross national debt, which is in the neighborhood of $14 trillion—this is what we always see on the national debt clock. The extra $5 trillion is intra-governmental debt, or debt that will one day need to be taken in order to meet Social Security and Medicare obligations. But to the degree the federal government functions as a single economic entity, which it does, it is not debt that actually exists, not yet, and truth be told, anything could still happen regarding Social Security and Medicare obligations.

The public debt is what the government actually needs to pay back today, and I think is overall the more sensible number to look at than gross debt when considering government solvency.

$9.2 trillion is a lot of money, which leaves a lot of question about the government's ability to pay it back. GDP estimates are around $14 trillion for the U.S., and yearly tax revenues (first column in the link) are in the $2.5 trillion range for the federal government. If the intest on the public debt stands at 5% on average, which I think overestimates it given how very low rates are now, then yearly interest payments on $10T would be $500B, which sits pretty manageably within $2.5 trillion of revenues, provided revenues hold constant and do not recede.

I'm going to guess the government could at least double the debt before default (or hyperinflation) would be a genuine concern. To the degree that government spending draws money away from private markets and burdens the productive capacity of the economy—the recent exponential growth of debt is still unwelcome.

Saturday, November 27, 2010


To the degree that taking out a second credit card when deeply in debt can be regarded as "prosperity," America's current economic state can be regarded as "recovery." 

At least Wall Street has been doing well with ongoing government interventions. Elsewhere economic activity would have to be viewed as tepid, but certainly things aren't crashing and burning. So recovery I guess it is. 

Driving this recovery, the Fed first dropped the prime lending rate to zero, for the first time in history, late in 2008, where they've been ever since and show no signs of turning around. Any recovery has to be viewed in the light that the Fed is handing dollars to banks and investment banks scott free. 

These lower borrowing costs trickle down to the rest of the nation as somewhat lower mortgage rates, lower bond rates in general, and, I've argued, higher stock prices

But when that's not good enough, when the Fed has to do more before deflationary forces assert themselves, there is quantitive easing. Here the central bank starts buying bonds—typically treasury but any kind will do—with freshly printed money. This accomplishes two things: (1) it drives bond rates down since bond sellers no longer have to offer interest rates which are as attractive, so borrowing costs overall are lower, and (2) it introduces a bolus infusion of cash into the economy, which is a temporary inflationary force to be reversed as the bonds mature and the minted cash returns to the bowells of the Fed.

The Fed began quantitative easing early in 2009, for around $2 trillion worth of treasury bonds and GSE debt, which recently came to completion. 

Surveying the economy, the Fed determined that more quantitive easing was necessary to stave away deflation. So, earlier this month a $600 treasury bond purchase was initiated by the Fed, known as "QE2." this wasn't unexpected to anyone following Fed activities, but did happen quietly and with little fanfare. Pretty much, it is a continuation of "QE1" rather than anything distinct. 

It does suggest that what economic forces and motives that dropped interest rates to 0% in the first place, and then initiated the first round of quantitive easing, are still with us today. 

Enjoy your recovery.