NYC Mayor Bloomberg: Highly-indebted U.S. could go the way of Europe
New York City Mayor Michael Bloomberg slammed the federal government for following the same fiscal path that has cost European governments so dearly, perhaps offering Democratic President Barack Obama and Republican challenger Mitt Romney hints about what policies he would like to see from them to win his endorsement as a moderate independent. Bloomberg’s seal of approval carries added weight because he is a billionaire businessman with close ties to Wall Street, a source of donations as well as a powerful force in the economy.
I think it is clear that we have a deficit problem that is going to hurt this country dramatically and unless we do something about it is a cloud on the horizon. It doesn’t mean America is going to go to zero… But I think if you take a look at Europe and other places and it shows you when you live above your means – It’s different than the city, the deficits we project are aspirational deficits, in the end we balance our budgets, the federal government does not.
The city by law must close any deficits. In contrast, the U.S. government can borrow to fund its operations – and at very low rates in recent years.
The mayor, now in his third and final term, was presenting an update to his $68.7 billion budget plan. One reason private employment in New York City has broken the 1969 record high is the city’s budget discipline, he said.
“We have to give people the clarity and confidence that we are going to face fiscal realities,” he said. The country’s failure to wrestle its deficit under control is curbing businesses from growing, he said. “Nationwide, there are some real questions in people’s minds and they are not willing to do that.”
New York City has regained about 180 percent of the private sector jobs lost during the Great Recession; the nation has only won back about 40 percent, he said. Private employment has climbed to 3.291 million, topping the decades-old high of 3.275 million. “We’re part of America; we want America to grow,” Bloomberg said.
Disappointing profits on Wall Street – the city’s economic motor – forced the mayor to slice his forecast for tax revenue by $352 million in the current budget and the new one that starts on July 1. The city is home to some of the world’s wealthiest individuals – including the billionaire mayor himself. Added Bloomberg:
Never mind the pain, feel the austerity
Austerity in the euro zone seems to be working — at least as far as the headline, dry, soulless numbers of budget balancing are concerned. Bailed out Greece and Ireland have reported substantial improvements in last year’s profligacy performance. Spain, while going in the wrong direction, at least has the satisfaction of being told it is not telling fibs.
We will get to the smoke and mirrors in a bit.
First Greece, the euro zone’s poster child for budget ill-discipline. The 2011 budget deficit to GDP ratio – basically the annual overspend — came in at 9.1 percent. This may seem like a lot given the EU target is 3 percent, but it was down from 10.3 percent a year earlier and from 15.6 percent the year before that. Furthermore, if you take out all the debt repayments costs that Athens has to make , you end up with only 2.4 percent (although in truth that is like pretending you don’t have a mortgage).
In Ireland, the craic was all about trouncing expectations. The deficit to GDP ratio for 2011 came in at 9.4 percent, which compared with an original 10.6 percent target and even a revised target just last December of 10. 1 percent. Everything is on track, Dublin reckons, to meet this year’s 8.6 percent.
Now, those not wanting their party pooped, please look away.
The official figures suggest that Greece’s improvement is almost entirely down to increased revenues. Government spending as a percentage of GDP last year was 50.1 percent, barely changed from a year early and only a tad down from 2008. And this comes after a number of years of painful austerity that has helped keep Greece in recession for more than four years — it is into its fifth now, staring at a 4.8 percent 2012 contraction — and that has pushed more than a fifth of the country out of work. Greece’s debt (ie accumulated deficits) as a proportion of GDP last year was 42.3 percentage points higher than in 2008.
Ireland, in the meantime, was enjoying its deficit improvement (still the worst in the euro zone) by finessing away one-off capitalisations into its banks that were worth some 3.7 percent of GDP. Including those and some others, the deficit last year was 13.1 percent. This comes after Ireland has made budgetary adjustments totalling 25.4 billion euros since 2008 — the equivalent to 16 percent of it 2011 GDP — and has had to hike taxes and cut spending by 8.6 billion euros between 2013 and 2015, i.e. another 5 percent of GDP. It is back in recession and seeing its exports hit by the troubles is main trading partners in the European Union are having.
Should central banks now sell gold?
Central banks in debt-strapped countries have a golden opportunity ahead of them, if you will excuse the pun, to help their countries’ finances by selling their yellow metal holdings.
At least, that is the message that Royal Bank of Scotland’s commodities chief Nick Moore has been giving in recent presentations — and he thinks it might happen. The gist is that gold is now at a record price but banks have not come close to meeting their sales allowance for the year.
Under the Central Bank Gold Agreement there is a quota of 400 tonnes that can be sold by central banks within a 12 month period and with only about three months to go in the latest period less than 39 tonnes has been sold. At today’s price that remaining 361 tonnes is worth some $14 billion.
Moore believes that euro zone central banks in particular may increase their sales because of the record price and the deteriorating fiscal positions. Furthermore, he reckons the price of gold will come down over the next 12 months as its safe-haven appeal eases and inflation expectations fade.
Among the so-called PIGS — Portugal, Italy, Greece and Spain — Italy is the major gold holder with qround 2450 tonnes. But Portugal has some 380 tonnes, Spain 280 and Greece 112.
Might current prices not tempt them to selling a few billion euros worth over the next few months to help balance the budget a bit?
Confidence vs. reality on Europe’s fiscal front
What do Poland, the European Union’s brightest economic light, and Greece, its dimmest, have in common? Both have plans to cut their budget deficits to the Union’s prescribed 3 percent level by 2012, and both of those plans depend on a lot of ifs.
I can already hear cries of protest from Poland, the only EU member to show any growth at all last year. It that has taken great pains to distance itself from more troubled EU states and is extremely proud of its growth results, with Prime Minister Donald Tusk recently telling the Financial Times: “Who would have thought we would see the day when the Polish economy is talked about with greater respect than the German economy?”
But the comparison still works, not only because Poland and Greece have promised to shrink their deficits so quickly — Greece from an expected 12.7 and Poland from around 7 percent this year — but also because they are depending on growth forecasts that may not materialise. Both stories are also emblematic of a theme sweeping across Europe — an effort by governments to build confidence over fiscal consolidation plans in an uncertain recovery.
Tusk, and Poland, have a lot to crow about. While Greece is struggling to maintain credibility and tackle its huge public debt load, Poland is expected to grow by 2.5-3.0 percent by many economists. Warsaw has a relatively low debt pile of around 50 percent of gross domestic product, compared with around 120 percent for Greece. Investors have flocked to Polish stocks and bonds, driving the zloty currency 27 percent higher from mid-crisis lows hit last year. And they see more upside on the horizon because, with a living standard of only 56 percent of the EU’s average, the country is seen as a sure bet for eventual convergence to near the levels seen in more developed EU states.
Greece is clearly a different story. Its economy is expected to shrink this year and the government has embarked on a programme of eye-watering budget cuts that have prompted strikes and protests among civil servants. While Poland has had no trouble borrowing on international markets and at home, Athens must still borrow 20 billion euros before May at much higher interest rates than before the crisis.
Their approaches are different but have one common factor: growth forecasts that many economists and policymakers see as unrealistic. Greece is depending on tax hikes, cuts to pensions and public wages, and other austerity measures. But a large part of is solution is based on a forecast that growth will resume in 2011 and reach 2.5 percent by 2013.
The European Commission has endorsed the plan, but has also cast doubt on the growth outlook, saying it sees Greece contracting by 2 percent this year, versus the government’s 0.3 percent forecast. The Greek government has since approved a third package of belt-tightening that both it and the Commission say should allow it to make the required 4 percentage points of GDP in fiscal cuts this year. But economists are still extremely cautious, and say risks include both that the government won’t be able to meet its tax revenue targets, or if it does, it will further depress the economy.
Bloomberg doesn’t know we have a fiat currency. And the author of the article thinks we “borrow” money.