James Pethokoukis

Politics and policy from inside Washington

 

The way out of (national) debt

James Pethokoukis
Jun 15, 2010 17:18 UTC
budget deficit | national debt | sovereign debt

National Review’s Stephen Spruiell makes the following point:

Italy (debt-to-GDP: 118 percent) has put together an austerity package that relies mostly spending cuts to do the heavy lifting. Portugal (debt-to-GDP: 86 percent) has put together an austerity package that relies mostly on tax increases. Because Italy is cutting spending instead of raising taxes, it has better economic growth prospects, and will bring down its level of indebtedness more quickly, than Portugal. That markets believe this is reflected in CDS spreads of 189 basis points for Italy, compared with 289 points for Portugal.

Me: Traditional fiscal austerity (higher taxes and less spending) has a poor track record because higher taxes are a growth killer. The way heavily indebted nations escape their fiscal traps is either through inflation or higher growth or default. The US should take Door #2 while also cutting spending.

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Why austerity won’t fix global budget mess

James Pethokoukis
May 26, 2010 18:36 UTC
budget deficit | national debt | sovereign debt

Bond guru Bill Gross makes this point:

Tougher sovereign budgets produce government worker layoffs, pay cuts, reduced pension benefits and a drag on consumption and the ability of the private sector to accept an attempted hand-off from fiscal authorities. Recession becomes the fait accompli, and the deficit/GDP ratio moves ever higher because of skyrocketing risk premiums and a plunging GDP denominator. In many cases therefore, it may not be possible for a country to escape a debt crisis by reducing deficits.

Me:  This certainly seems to be the case with Ireland, as it has for most countries trying this path to escape a debt trap. As I point out in this Weekly Standard piece I wrote, the best way to solve a sovereign debt problem is by cutting spending and boosting economic growth.

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May 28, 2010
9:35 am UTC

WORLD is broke ?

05/06/2010 – TODAY BREAKING NEWS
15,20 p.m.
New York City
Wall Street – NYSE Stock exchange

Fifteen minutes ago, Dow fell suddenly 900 points, scaring even the glamourous dogs peaceful morning walk at the high Central Park, with one of the most sudden drops ever seen in the US market.

One minute later, Dow and SP500 climbed again till a -3,6% level, closing around -3,20%, waiting for tomorrow´s new surprises.

It was said that Greece concerns over a possible debt default affecting additional countries in South Europe, has been the main driver of this panic scene.

A systemic risk once again flouring around the world economies, just in case several key european countries cannot pay their huge sovereign debt and renew therefore, their cash needs.

I am really impressed on how we forget our recent past, or how we care for things that one day after another have been there and nobody has paid any attention to.

1) HOW MANY TIMES has been said that the US PUBLIC DEFICIT is unsustainable ?

2) EVERYONE expects that one day, the US will pay its entire debt charge ? … Of course not. But this has been so, for such a long time that if one day the markets panic because of this reason I would not understand the surprise of many.

I completely agree that today´s situation or even these week´s drops in Dow and SP500 are driven by speculators playing games again. But this time, playing with entire countries such as GREECE, PORTUGAL, SPAIN or ITALY. But they play with issues that are there, that are critical and that nobody looks at them the way they deserve.

So, and as investors, how must we react to these events ?

Very simple. Ups and Downs, volatility, etc … But the riskiest thing now in markets worldwide is that this volatility is increasing heavily, and this makes extremely difficult to guess future market trends.

I strongly believe in the CYCLES theory ( I published a post in this blog with regards to this point called “CYCLING” ), but in our current market situation, even this theory becomes terribly doubtful.

SP500 was reaching maximum levels. That is true. So, a correction was expected.

But my doubt now is: Is this movement today a correction signal or maybe a once again systemic default risk ?

I really think the answer is NO. It is NOT acceptable that governments once again let the world enter into a systemic risk, so I really hope that this will only be some kind of wear correction.

Let´s see tomorrow … and the day after tomorrow … to confirm if this hope is real.

Meanwhile, it is also true that problems such as the countries PUBLIC DEFICIT is there, it has always been there, and if we get really serious with this, let me tell you the problem has not an easy solution.

Jose Luis Revilla Escudero
Chairman & CEO
WWShares, Inc
-Private Wealth Advisors-
http://www.worldwideshares.blogspot.com

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