Skip to comments.Forget PIIGS, US Debt Is Out of Control (depreciation of the dollar looms)
Posted on 06/06/2010 8:59:15 AM PDT by SeekAndFind
The markets are in turmoil because of worry about the so-called PIIGS (Portugal, Ireland, Italy, Greece, and Spain) debts. In Fiscal Crises: The Next Shoe, I opined that Greece is just the canary in the coal mine and that when we look homeward, we have our own huge debt issues, which aren't significantly different from those of the PIIGS countries. I believe that the only reason the European contagion hasn't yet spread to America is because of the dollars status as the worlds reserve currency. That era is coming to an end, and it would behoove America to get its house in order.
A May 14, 2010 Barrons piece entitled Were Not Greece -- Yet (D. Henniger) referred to a Royal Bank of Canada (RY) study that concluded that Although the states of California, New York, New Jersey, Massachusetts, and Illinois are comparable in terms of economic output and population to Portugal, Ireland, Italy, Greece, and Spain, RBC finds that states debt burden are nowhere near that of the PIIGS. This, even after including unfunded liabilities for states employees pension and other benefits. As you'll see below, I take issue with the above conclusion, and the first half of this piece will deal with why. Basically, citizens of each US state are responsible not only for the debt burdens of their states and localities, but they're also responsible for their proportionate share of the federal debt. As you'll see, the combination of the two produces debt ratios far in excess of those of the PIIGS.
Table 1 shows the PIIGS data that the markets are concerned with.
Table 2 shows estimates (for fiscal year 2010) of the Population (1), State GDP (2), State Debt/State GDP (3), Local Debt/State GDP (4), Unfunded Pension/State GDP (5), Other Unfunded Benefits/State GDP (6), Total Debt/State GDP (7), and Per Capita Debt (8) for the states mentioned in the Barrons piece plus Michigan.
Using California as an example, the population is rapidly approaching 40 million, the states GDP is estimated at $1.87 trillion, the State Government Debt/State GDP is 7.4%, Local Government Debt/State GDP is 17.2%, Unfunded State Worker Pension Liability/State GDP is 27.8%, Unfunded Other Health and Benefit Liabilities/State GDP is 3.3% for a Total Debt/State GDP of 55.7%. Translating this into Debt Per Capita reveals that every California citizen owes $26,000 for debt or liabilities contracted by their elected officials. Looking back at Table 1, this isnt too different than the Debt/GDP ratio of Spain. And looking down the Total Debt/State GDP column of Table 2, it becomes apparent that both New Jersey and Illinois have Debt/GDP ratios equivalent to that of Spain.
But wait! Citizens of the states in the US are also responsible for the debt piled up in Washington, DC. So, to the debt of the states and localities, one must add the national debt. The first three rows of Table 3 show an average of all State (row 1), Local (row 2), and Federal (row 3) Debt/GDP and the Per Capita dollars owed by each US citizen.
Using the table, look at the intersection of the "Cumulative (%)" column and "+Agency" row, which represents the recognized public debt of the federal government and its agencies and an average state and local burden. One can see that at 134.6% of GDP, debt burdens are higher than those of all of the PIIGS countries that have given the markets so much heartburn. Table 4 substitutes the debts of the states shown in Table 2 for the "Average State" and "Average Local" and shows the indebtedness of the citizens of these states per capita and as percentages of both State and US GDPs. All of the states shown have Debt/GDP ratios significantly higher than that of Greece.
Now, I'm not an expert on debt levels in European countries. And, it could well be that citizens of those countries have taken on public debt that would be similar to US State and Local debt that isn't in the figures shown in Table 1. But, because the absolute levels of the Debt/GDP shown for the PIIGS have been a cause for concern, then the debts of the citizens of the US, and, specifically those states shown in Table 4, should also be cause for grave concern. For the most part, the European states are at least considering austerity measures. And while some US states are being forced into austerity because of their inability to print money, the major contributor to the indebtedness, the US Congress, doesn't seem all that concerned. This is a major difference from what's occurring in Europe.
So far in this piece I've only talked about public debt. Usdebtclock.org estimates total personal debt at $16.6 trillion, mortgage debt at $14.1 trillion, consumer debt at $2.5 trillion, and credit card debt at $848 billion. (Amazingly, of the four types of private debt, only consumer debt is shown at usdebtclock.org as expanding; the other three categories of consumer debt are contracting. I wish I could say the same about public debt!) So, on top of all of the public debt, each US citizen, on average, owes privately $53,525. Adding the public and private debt together totals $117,181 per capita, or a total Debt/GDP ratio of 248% (see Table 3). Wow! Now that's a lot of debt!
Finally, the unfunded liabilities of Social Security and Medicare are nearly $109 trillion, or about $352,000 per US citizen (see usdebtclock.org). That number alone is a Debt/GDP ratio of 745% and is so outside the realm of rationality that I didn't bother to put it in the table. Clearly, the recipients of these promises can't possibly hope to receive such benefits in current dollars. Depreciation of the currency or significant cutbacks in the promises (or both) is inevitable. The recognition of the real magnitude of these irresponsible promises should be enough to cause a loss of confidence in the dollar. In my view, unless the US moves to at least begin to address these issues, that day is closer than anyone might think.
All of the public debt was originated by governments and most of the private debt by banks or other financial institutions. In feudal times, serfs owed a significant portion of their toil to their lords. Have times really changed? The lords are now the politicians and "Too Big to Fail" bankers. Many ordinary people are serfs, highly indebted either voluntarily (private debt) or involuntarily (public debt). Looking at debt in this way helps to explain the unholy alliance between Washington and Wall Street (see The Unholy Washington-Wall Street Alliance) and why the "Too Big to Fail" and Washington politicians get richer and richer at the public's expense.
While US citizens are drowning in debt, the political system appears incapable of reducing it. In fact, the politicians continue to expand it in the erroneous belief that more debt will help. There are only two ways out: years of austerity or currency devaluation/inflation. The political system won't allow the former. Buy Gold!
-- This article was written by Robert Barone, head of Ancora West. Barone currently serves on AAAs Finance and Investment Committee, which oversees $5 billion of investable assets. This column was originally posted on AncoraWest's Market Insights.
Depreciation of the dollar wouldn’t be the worst thing in the world.
If we want to try and bring back manufacturing to this country we’re going to need some dollar depreciation.
a 2 minute round-up on the global sovereign debt crisis - very funny and accurate.
Indeed: devaluing the dollar would make our exports more competitive, imports less competitive (spurring U.S. activity to compete with foreign companies), and make the part of my pension fund invested overseas more valuable in dollar terms (^_^).
“Higher interest rates will probably be the future if we don’t get our debt under control.”
...I wouldn’t mind a little bit higher interest rates...the interest I’m getting on my savings at the bank is miserable.
Look at the experience of every country that has devalued its currency. First, you get a trade advantage and sell a little more to other countries. Then you realize you are paying more for imports. (China/Walmart anyone?) Then you have inflation. Bad inflation. Then your standard of living goes down. And your standard of living stays down.
How do you like your dollar devaluation now folks?
The trouble is, because everyone and every thing (the Feds and the states, counties and cities - and probably you) in this country is living on borrowed money, when the borrowing stops, the standard of living must go down and stay down. Now show me the politician who is willing to take the responsibility for that.
Funny because its soo true. Thanks for posting.
There are two ways out...
Default on debt
Inflate our way out.
It appears that the inflation method is becoming more difficult than thought.
Is this evidence of the battle between the ‘deflation’ and ‘hyperinflation’ camps?
“How about CUTTING SPENDING AND ENTITLEMENTS and GROWING THE ECONOMY? I guess this isn’t politically viable.”
We can’t do anything that’s inconsistent with big government now, can we? /sarc
CUTTING SPENDING AND ENTITLEMENTS and GROWING THE ECONOMY
Only if you believe in individual liberty and economic freedom. There are few of us out here. Those of us who know how to create value and who believe that is the correct path to prosperity are out numbered by those that capture value instead. This means a shift has occured. The ‘progressives’ just don’t see it yet. After the election of the leftist, producers have taken defensive action. We’re the ones ‘in the bleachers’ that Obama talks about. We refuse to participate in the destruction of our economy though the left is doing a pretty good job by themselves.
The far left and their agenda has been exposed by Obama for all Americans to see.
Americans are witnesses to it just as Jews were the witnesses (and victims) of the Holocaust.
Very useful compilation of data. It confirms that the U.S. is a far bigger PIG than any of the PIIGS. And unfortunately, the nation is now being led by the biggest porker ever.
I’m not living on borrowed money. I worked 80 hrs a week and had to be away from all all the time and missed much of my kids growing up so that I managed to retire before I was 47.
This oil spill may end up driving me back into some kind of career activity, if just because it will take away my ability to go fishing all day it looks like.
Having said that, the price of imports going up to the point where they can’t compete with domestic products is probably a good thing. I used to be a huge free trader as most MBAs are but for our country, we can’t have both free trade status and maintain a strong currency vis-a-vis the rest of the world with the costs of livings and US dollar living standards we have in America.
That’s what spurs outsourcing.
I think dollar depreciation represents one way to at least bring down unemployment and therefore ensure stability. Would I stand to lose money? Absolutely. It’s why I’ve begun reducing my liquidity and putting it into what I hope are fiat proof assets. It doesn’t mean I can’t see that from the macroprospective the US is facing a lot of unattractive choices and devaluation of the dollar is among the least unattractive of them.
One important difference. We can do something that Greece and Latin America can’t. We can basically go into de jure empire mode and actually begin conquering our friends and neighbors and taking their resources back to the United States.
When do you think the Romans became true expansionists? It was in the first century BC when the Roman state was undergoing so much upheaval that they needed the money from vast colonial possessions just to sustain the social system in Italy.
I think we must start adopting FAIR TRADE POLICIES to go along with our FREE TRADE POLICIES even if it means getting into tariff wars with our trading partners. Most of our big trading partners such as China take advantage of us trading wise. It’s about time we fought back and use the same tools these guys use against them.
In a time of high unemployment and massive private job losses the answer is no.
Federal government becomes the last refuge of those who can’t find work in the private sector, either through federal work or federal assistance.
Think of the census workers. These people are encountering a very hostile public. Why then do it? They do it because its the only thing they can get and when it ends these people are back to square 1.
There are firms advertising jobs in the country who now openly advertise that they’ll only consider those already employed and informally that is practiced among many other companies. In an economic climate like this that is catastrophic.
I believe in small government and I’m anti-taxes. However, the time to cut the federal payroll and begin seriously taking on entitlements and the deficit was in the 1980s and 1990s because the only time an economy can absorb a cut in the public expenditures and not see it be a net negative and not a positive is when the economy is in boom because then the private economy easily absorbs those coming out of the public sector.
If you ended unemployment and laid off 15% of federal workers today all you would do is further harm consumer demand and make an already bad situation 5 times worse.
There is no magic panacea. There is no magic bullet. All the choices we’re faced with are bad. The easiest and most effective could very well end up being WWIII.
That's not going to happen. We have a major s*** storm headed our way and the only question now is when