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.