Japan's triple-A rating foreign credit rating has been downgraded. While this is not a major event, the article above states that this action by Moody's investor service could cause people to question the creditworthiness of other nations.
The value of outstanding Japanese government debt is more than 170 percent of gross domestic product, making it the most indebted government in the Organization for Economic Co-operation and Development, a club of industrialized nations. The debt burden is a legacy of massive government spending to cushion the economy during a decade of deflation that began in the 1990s.[...]Still, Moody's cited the level of debt, the expansion of government spending and the crumbling economy as reasons for its new rating.'Given the size of Japan's overall public deficit it obviously should not enjoy the highest rating. Japan has fiscal obligations which will span generations but it is certainly not a dire outlook,' Glenn Maguire, economist at Societe Generale in Hong Kong.An opinion piece by Barron's examines sovereign debt: "On the latter, Standard & Poor's lowered its outlook for Japan's sovereign debt rating to 'negative'. 'While Japan's long-term debt rating remains double-A, the outlook for that high rating no longer is 'stable.'" Concerning America's debt the article points out the statement by the CBO,
There have been no new private sector jobs created over the pass eleven years. At the same time government jobs have grown.Similarly, Doug Elmendorf, the director of the Congressional Budget Office, called the outlook for the federal budget 'bleak.' The CBO projects the current year's deficit of $1.35 trillion to equal 9.2% of GDP. CBO forecast total publicly held debt to rise to 60% of GDP this year and 67% by 202o. In 2001, publicly held debt equaled just 33% of GDP. While Japan has a much higher debt-to-GDP ratio, its government debt is almost entirely held domestically. Japanese savings readily finance the deficit at ultra-low rates, around 1.33% for 10-year government bonds. But its rapidly aging population will begin drawing down those savings, leaving less to fund the budget deficit. By contrast, the lion's share of U.S. debt is held by foreigners,[I always thought that Americans owned most of this debt?] making a rising debt-to-GDP ratio even more politically sensitive.
The Bush tax cuts are about to expire. This means that taxes will go up for higher income workers and capital gains taxes will go up. Here is a good opinion and overview on all of the tax increases. We all know the damping effect that tax increases will have on the economy.
The Heritage Foundation did a good overview on President Obama's budget and the CBO's ten-year budget baseline.
It looks like a bigger financial crises is looming. This according to the special inspector general for the TARP,
The problems that led to the last financial crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky A, the special inspector general for the trouble asset relief program, or TRP. The quarterly report to Congress was released Sunday. The government's bailout of financial institutions deemed 'too big to fail' has created a risk that the United States could face a worse fiscal meltdown in the future, an independent watchdog assigned to review the program told Congress on Sunday.[...]'Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car,' Barofsky wrote.Many of the underlying causes of the financial meltdown have not been addressed and instead many of the causes have been expanded and carried out on a larger scale such as in the housing market.
'Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car,' Barofsky wrote.[...] Much of Barofsky's report focused on the government's growing role in the housing market, which he said has increased the risk of another housing bubble. Over the past year, the federal government has spent hundreds of billions propping up the housing market. About 90 percent of home loans are backed by government controlled entities, mainly Fannie Mae, Freddie Mac and the Federal Housing Administration. The Federal Reserve is spending $1.25 trillion to hold down mortgage rates, and millions of homeowners have refinanced at lower rates. 'The government has stepped in where the private players have gone away,' Barofsky said in an interview. 'If we take government resources and replace that market without addressing the serious (underlying) concerns, there really is a risk of" artificially pushing up home prices in the coming years. The report warned that these supports mean the government 'has done more than simply support the mortgage market, in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor.'When people are not able to pay their mortgages due to a downturn in the economy(see Barofsky's take above), it won't be the banks failing, it will the the U.S. taxpayers as a whole--the Country.
About 38 million people are on food stamps.
This is major. According to Boortz, Uncle Sam wants your retirement. The government is running major deficits and is in need of money. Foreign nations have already expressed that they are unwillingly or unable to continue to finance Washington's spending. So they are coming after you. There are more than 3 trillion dollars out there in individual retirement accounts. There was already an economic professor advocating before some congressional committee the government take-over of retirement accounts at the beginning of the recession, she was given full attention. Social Security is going bankrupt, according to my SS statement. This is a portent of what will happen to your retirement savings that the governments wants. The government takes 14% of your money each pay check to fund SS. It has wasted that money. Now it wants your savings. This might be on the peripheral now and just talk, but it is a step towards the government taking over retirement accounts. I have about 35 years until I retire. Since 09, I have stopped contributing to my IRA.
It looks to me like the Obama administration is starting to eye your retirement. As of right now, it might look relatively harmless . but the Obama et al are 'weighing how the government can encourage workers to turn their savings into guaranteed income streams.' Call me paranoid, but this looks to me like just the opening shot of what will become an attempt by the government to seize your retirement funds[...]You may think that I am blowing smoke, but the chairman of the House Committee on Education and Labor Rep. George Miller has said that 'sweeping changes are coming to the 401(k) system'. Part of a plan presented to his committee by a woman by the name of Teresa Ghilarducci included confiscating workers’ personal retirement accounts and converting them into accounts managed by the Social Security Administration.
There are debt crises in the European Union nation's of Greece, Spain, and Portugal. And according to the article, this could be portent what will happen in America,
'The problems currently faced by peripheral Europe could be a dress rehearsal for what the U.S. and U.K. may face further down the road,' Jim Reid, a strategist at Deutsche Bank in London, wrote in a research note today.[...] The U.K.’s budget deficit hit 15.7 billion pounds ($25.3 billion) two months ago, the most for any December since records began, the Office for National Statistics said Jan. 21. Moody’s Investors Service said in December its top debt ratings on the U.S. and the U.K. may 'test the Aaa boundaries.'The EU could just bail these countries out as a last resort. But who will bail the EU out when it goes bankrupt?
This is all little bits of economic news I have read and found interesting in that it indicates that the major causes of this recession have not been addressed but have instead been expanded. Another downturn looks like a very real possibility in the future. The forecast for the economy does not look good, a sentiment echoed by my economics class. These four years will stand along side the Great Depression as a major shift in the role of government and the public's opinion of what role the government should have in the economy here in America. The fact is that the economy is on the decline and will be slow for years to come. This information is good for those that plan on working in the private sector someday; and in general for planning out your future. It will be interesting to see how all of this will play out.
The world does seem to be moving steadily towards a real fundamental meltdown, caused mainly by this blog's main nemises, bloated bureaucracies. All the elected governments' solutions are to try to ease the pain and make sure government employees are being paid, while not addressing the fundamentals of the problem. Just like TARP and the Stimulus, saving the banks from disaster and making sure government unions are placated, but not reforming Fannie & Freddie Mac, and not doing anything to get the wealth-generating entrepeneurs back on their feet.
ReplyDeleteAnd I'm afraid that this problem will show the general ineffectiveness of Melkor's sainted IOs. It will take a crumbling of the edifices and a rebuilding by those who can (ie entrepeneurs) and a fundamental refocusing of what government is about to solve these problems.
From everything I read on the economy, it does seem like a major-global economic problem is a real possibility in the future,10-20 years down the road, IF major changes are not made. The only way the path we are on will be changed is when things get to the breaking point. I don't know if this meltdown will be like the 1930's great depression, but I do think it will be enough to force a major shift in the world economy and governmental structure. IF a global economic meltdown does occur, then it could be a catalyst or reason to put this global government structure that is being created in to play, like the 1930's put into play big government. One question I have, is who will be bailing out all the entities that are doing the bailing out? Nothing has changed that would prevent them from having to be bailed out. The fact is that America is in uncharted territory when it comes to the economy.
ReplyDeleteA major depression does need to happen in order to flush out all of the fundamental problems in the economy. All the governments are doing is delaying the inevitable and setting it up to be much worse than it would have been if they let the free market work. I don't know if the people would be willingly to go through a depression.
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ReplyDeleteIt's interesting that the only countries that are willing to do the the type of austerity programs that I think are hinted at in here as being good ( bring down debt, decrease deficits, and slash government spending) are in the EU. A socialist government in Greece was elected with the specific mandate to SAVE bloated government pensions and jobs and the EU is compelling them to do otherwise. You know who isn’t going to get to save government jobs and pensions? The Socialists. You know who isn’t going to get re-elected? The Socialists. You know who is incapable of acknowledging their own warped demands for state services without taxes? The People. What can compel a democratic government to commit political suicide to do what is best for the people despite their selfish, ignorant, inability to know that it’s in their best interest? A Supranational Organization.
ReplyDeleteYou’re right that a global meltdown presents the greatest threat to IO’s, but that is certainly not an argument that IO’s don’t possess the superior tools to combat this crisis. We certainly don’t (and didn’t even when Republicans were in charge).
In the case of Greece and the EU, as of now the EU does not have the constitutional authority to bailout Greece or any other nation. This situation is testing the effectiveness of the EU in more than one way. The situation will have to play out to see how this all works out. All Germany and France can do now is pledge support and try to exert some form of pressure to make Greece change course, I don't know what pressure. From what I have read, it seems like the EU will have to bailout Greece if they don't cut spending and avert an economic mess, I don't know if Greece will be able to due to public pressure or threat of civil unrest. If Greece's economy goes down, then they will have to leave the EU, leading up to a breakup of the EU. IF the EU will bail them out this could hurt the Euro, see draft post, and bring the other EU nations down economically, Germany is heading back into recession. This will set a precedent to the other EU nations if the EU just bails them out. The smaller nations will then have not reason to have sound economic policy. If they do bailout Greece, then the EU would have to be given greater authority to intervene in the EU nations to offset the lack of incentive to have sound economic policy.
ReplyDeleteThe IMF could help, but this would be embarrassing to the EU. Maybe some larger IO could do something?
I wonder who or what will compel the supranational organizations to have sound fiscal policy?
Melkor: "What can compel a democratic government to commit political suicide to do what is best for the people despite their selfish, ignorant, inability to know that it’s in their best interest? A Supranational Organization."
In this case, this would be a good thing, but these organizations could compel nations to do things that are not in their best interest too. I just wonder if this type of power being in an all powerful organization is really a good thing.
I look at the U.S. federal government and state's. The federal government, an IO, and states, individual nations. The FG has trampled states rights and has grown to the point of reducing the state's sovereignty. I don't know if this is a good comparison and I would have to develop this parallel some more.
I believe that global meltdown presents a golden opportunity for IO's. It would present a catalyst or reason to give them greater authority. It would almost certantly strengthen them. I don't know if that would be a good thing.
Being that the "constitution" is only about two months old, what "constitutional authority" means is relatively murky. you could say that France and Germany didn't have the authority to run their own deficits (then under Chirac and Schroeder) above the Euro designated 3% but they did it anyway. A negotiated settlement solved that particular test of the EU and Greece will likely be solved by a settlement as well (currently there is an agreement to wait one month to investigate Greece's proposal to slash 4% of deficit as credible).
ReplyDeleteI also don't see a credible link to Greece going down leading to the break up to the EU. You overlook the massive economic benefits that are accrued by being within the Common Market vs without. Even if the Euro is devalued to nothing, nations might opt out of the currency zone (as has been negotiated by England and Denmark) but they certainly won't opt out of the common market.
Regardless, nothing you've said negates the fact that if it weren't for the EU, the Socialist Greek gov't would certainly not be proposing slashing public spending by 4%, raising retirement ages, and increasing taxes. They would be doing quite the opposite.
Your fears of a IO's dictating to the powerful were previously dealt with in my arguments about the control that the powerful would have in such organizations. Secondly, I think this might be a good example of where too much sovereignty of a state is a BAD thing. Inherent freedom isn't necessarily a good thing, especially when it's abuse results in a collective harm. If the actions of California were to jeopardize the dollar maybe the Federal Gov't ought to intervene against shitty state rules/laws that make it incapable of governing.
I am not trying to state facts here. I am only stating my observations as I am still trying to figure out where these developments are leading to.
ReplyDeleteAccording to this guy it could led to a break up of the Euro and/or eurozone. http://www.dailymail.co.uk/news/worldnews/article-1250433/Greece-debt-bailout-EU-leaders-split-euro-crisis.html
"Claims that the euro could be headed for total collapse are particularly striking when they come from one of the oldest and largest banks in France - a core founder-member. In a note to investors, SocGen strategist Albert Edwards said: 'My own view is that there is little 'help' that can be offered by the other eurozone nations other than temporary, confidence-giving 'sticking plasters' before the ultimate denouement: the break-up of the eurozone.' He added: 'Any 'help' given to Greece merely delays the inevitable break-up of the eurozone.'[...]Even if Greece receives a one-off bailout it would not solve the real problem, which is the huge differences in competitiveness between the eurozone's richest and poorest members. If these differences are to be evened out, the EU would need a single budget and common taxes so it can redistribute resources.[...] Mr Edwards argued that Portugal, Ireland, Greece and Spain are too economically weak to withstand the rigours of eurozone membership.[...]Harvard University Professor Martin Feldstein, a long-standing sceptic on the euro, yesterday said the single currency 'isn't working' because member governments have no incentive to keep their public debts under control. 'There's too much incentive for countries to run up big deficits as there's no feedback until a crisis,' he said."
Doesn't a common currency facilitates trade with and among the smaller EU nations to be beneficial or possible? Would the demise of the Euro bring about less trade by raising barriers to this trade, thus the break up of the common market?
It seems like there is an inherent flaw in the EU that needs to be solved by a single budget and common taxes so it can redistribute resources. As noted above. This crises could be leading to this. Might be a good thing.
The link between Greece's economic problems and the future of the EU appear to me to be that if Greece does not get its debt down which is required for EU membership, the choices are for it to be bailed out, or for the EU rules to be adjusted--these two will lead to more debt problems as it would reduce the incentive for individuals nations to not go into massive debt and overall the EU would just be assuming debt --by the EU bailing out nations it will only bring down the EU economically as a whole. The only way for the EU to not be affected or to potentially have an major economic problem come out of this is for Greece to fix its economy under its own power. I believe these debt problems will led to a more powerful EU.
The powerful EU nations are telling Greece what to do. A good thing now. IO's are basically made up of the powerful nations.
I am not trying to say that the EU is not forcing Greece to change; however, I wonder if it would be better to let Greece collapse so that people can wake up. By delaying the collapse or by having stopping measures that only slow the inevitable from happening, is just a delaying all of these fundamental problems from surfacing.
The bottom line with the EU is that many of the nations are facing debt/economic problems. How this is dealt with will be interesting to watch. Will it led to a more powerful Eu with more authority to intervene in the individual nations, economic problems leading to more powerful governments, or the break up of it or nothing big at all?
In the case of California, I haven't heard anything new about it. Your situation that you present would require the Federal Government to step in an bring about better economic policies on the part of California, but what is actually happening? A bailout would be bad for the whole Country's economy.
I don't know Melkor, Greece overspends because it counts on wealthy Germany and France to bail it out, as do the rest of the Mediterranean EU states. If Greece were on their own, they would have melted down already, or would have tightened their belts already. They are only responding now because they see that the Golden Goose may be threatening to withhold her eggs. So yes, the EU is forcing Greece into being -a little bit- more responsible, but I claim (and could very well be wrong) that they've only gotten so irresponsible in the first place because they were in the EU.
ReplyDeleteSort of like California: California government knows that if/as things go totally down the toilet, it knows that the Feds will bail them out to a certain extent. If there were no federal government behind them, California would have already gone through radical restructuring or bankruptcy.