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A “Sustainable Path for Greece”?

On July 22, 2011, in Debt, Europe, by Tim

The Greek sovereign debt crisis, now rapidly approaching its two-year anniversary later this year, has resulted in a second major bailout of about $160 billion for the wayward eurozone nation as described by European Union leaders late yesterday.

Based on the details of the deal provided in this Reuters report, it’s a rather complicated agreement that may or may not result in credit agencies declaring Greece to be in some form of default on its debt. Fitch ratings said they expect to assign a new “post-default” rating of “low speculative-grade” to their bonds, if and when all the dust settles.

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Gold/Debt Quote of the Year

On July 21, 2011, in Asia, Commodities, Debt, by Tim

Buried within one of the two articles this week in the mainstream financial media that were glowing over gold comes what, in my view, is one of the best quotes about the price of gold and the cost of debt today, in a world where paper money and credit have been causing an increasing number of problems for policymakers around the world.

First, the two stories from today’s links post:

(Also, if you are interested in mining stocks, Yukon junior miners in particular, have a look at Yukon Once Again a Leading Address for Gold Exploration at StockHouse.)

Anyway, one of the best quotes about gold and debt I’ve come across in a long time comes from Credit Suisse economist Dong Tao, who, in the Reuters report above, commented on the problem China’s central bank faces in adding to its gold holdings via their trade surplus.

Last year, global gold supply, including mine production and scrap, stood at 4,108.2 tonnes, which translates into about $210 billion at current price. Above-ground gold stocks stood at an estimated 165,000 tonnes, valued at more than $8 trillion.

By comparison, the amount of U.S. debt held by the public stood at $9.75 trillion by July 19, doubling from five years earlier — adding nearly $1 trillion a year, based on data from the U.S. Treasury Department.

“Central banks have the will to increase gold holdings, but it is not a practical option and rather difficult,” said Dong Tao, chief regional economist at Credit Suisse.

“Gold supply simply doesn’t grow as fast as China’s foreign reserves. Only the increase in U.S. debt can match that.”

When you read something like this, you don’t know whether to laugh or cry – laugh because central banks in a world full of paper money are no so far detached from a system of sound money that they can’t reasonably go back to anything approximating one … and cry because,  however these imbalances are resolved, it is likely to be very painful.

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A Very Moveable Debt Ceiling

On July 20, 2011, in Debt, by Tim

The Economist provides this handy reference on the moveable U.S. debt ceiling that goes back more than 70 years. It’s remarkable to think about the pre-1970 era when it only needed to be raised once every five or ten years. Amazingly (at least, in the context of today’s debt ceiling debate), during the 91 previous times that the debt ceiling has been raised, it has been done almost a year in advance of hitting the old ceiling.

As I’ve noted here many times before, as much as anything else, the real Reagan Revolution was about expanding credit and debt in both the public and private sector, the Federal government’s share of that effort shown above.

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Coming to a Pension Fund Near You?

On July 12, 2011, in Debt, Our Culture, by Tim

The current woes and future course of public finances in Central Falls, Rhode Island could be a sign of things to come in other parts of the U.S., that is, unless the overly optimistic assumptions about pension fund returns actually come to pass (another argument for why higher rates of inflation and a commensurate surge in asset prices could be seen as a blessing in disguise for policy makers). Details are in this New York Times story today.

A Small City’s Depleted Pension Fund Rattles Rhode Island

The small city of Central Falls, R.I., appears headed for a rare municipal bankruptcy filing, and state officials are rushing to keep its woes from overwhelming the struggling state.

The impoverished city, operating under a receiver for a year, has promised $80 million worth of retirement benefits to 214 police officers and firefighters, far more than it can afford. Those workers’ pension fund will probably run out of money in October, giving Central Falls the distinction of becoming the second municipality in the United States to exhaust its pension fund, after Prichard, Ala.
…
The last American state to default on its bonds, Arkansas in 1933, got in over its head by trying to help struggling municipalities.More recently, when local governments have veered toward bankruptcy — Orange County, Calif., in 1994; Cleveland in 1978 — neighboring municipalities have found it harder to sell their own debt. During the New York City fiscal crisis of 1975, New Jersey suddenly found its bonds harder to sell.

“That type of contagion is what you’re trying to avoid,” said James E. Spiotto, a bankruptcy specialist at the law firm Chapman & Cutler, who is not involved in Rhode Island’s problems.

The word “contagion” is one that we might be hearing a lot more of here in the U.S…

There are lots of details in this report and it seems that all municipalities and states are going to face their own unique set of financing troubles. But, more likely than not, areas like Central Falls, where public sector workers are promised generous disability pensions and early retirement during which they get free health care will be the first to have problems.

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Don’t Rock the Boat

On July 7, 2011, in Debt, by Tim

I’m not even sure if this cartoon really makes sense (surely, after the events of today at least, the donkey luring the dopey tax increase guy would be the better metaphor), but just the sight of the boat about to be tipped gave me a good belly laugh.

From the Dana Summers archive at Tribune Media Services.

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Government Aid Aids Incomes and Spending

On July 1, 2011, in Debt, Economy, by Tim

Another item over at the Wall Street Journal economics blog provides some needed context for the ongoing “recovery”, noting the important role that government aid has played in supporting incomes and consumer spending.

Steve Blitz, senior economist at ITG Investment Research, looked at the performance of personal income during this business cycle. Wage and salary disbursements peaked in March 2008 — three months after the recession started — and cratered until early 2009.

Even by May 2011, paychecks are still shy of where they were at the 2008 peak, Blitz says. The paycheck gap is the result of job losses, loss of overtime and wage cuts put in place during the recession.

So, what allowed consumer spending to surpass its 2008 peak more than a year ago? In large part, cash paid by the government, especially the money that kicks in when economic troubles hit. These automatic stabilizers — such as jobless benefits and family assistance — “mollify the impact from a recession,” says Blitz.

Blitz added government transfer payments — excluding Social Security, Medicare and Medicaid — to wages and salaries. This combination of incomes returned to its March 2008 level in January 2010, right before consumer spending recovered. Since then, it has grown $332 billion, providing money to keep consumer spending rising, if only weakly, so far this year.“If not for transfer payments, the household sector and, in turn, consumption would have fared much worse,” says Blitz. “Something for the fiscal negotiators to keep in mind as the debt ceiling confabs go on and on and on.”

Naturally, this wouldn’t be such a big deal if the government had tirelessly socked money away in a “rainy day fund” during the good times to take care of those individuals who lose their jobs during the bad times, but it’s not – like all other spending in Washington, about 40 percent of this aid is just newly borrowed money.

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