Friday, February 5, 2010

Sovereign Risk Chart - Where Would the US Fit in, on Europe's Scale? Also, Bill Gross Chimes In

A very nice chart via FT Alphaville - that cross references fiscal deficit as % of GDP versus total debt divided by GDP for the European nations.  As we often have discussed the P(ortugal)I(reland)I(taly)G(reece),S(pain) - it is nice to see how they stack up, in graphical format.

[click to enlarge]

What I decided to also show above was where the USA would stand if it were a European country - I used a range because if I just used a "dot" someone could come in and criticize the precise placement.  The reality is we are now running a fiscal deficit of 11-13% of GDP, with no end in sight in the near term... and EXCLUDING liabilities of Medicare, Social Security, and now Fannie and Freddie which the taxpayer has unlimited losses on for the next 3 years - we are at about a 80% debt to GDP ratio.  And with the recent increase in the debt ceiling which will take us through the end of 2010, we are on pace to reach 100% by this time next year.  (GDP is a bit over $14 Trillion in the US)

So what does the chart tell us?  The US is a disaster and aside from Greece, we are worse than all the "PIIGS" we are hand wringing about.  I think this is very important for Americans to understand...

Now you may ask - why do people flee into the US dollar and its bonds when we are a complete mess?  The same reason the UK is not under fire by the market (yet).  The ability to kick the can, throw its people under a bus, lower their standard of living, and effectively steal their money.  It's called a printing press - a central bank who is happy to print new fiat money to pay for debts.  

This is what has the member states of the European Union in trouble - they do not have their own "in country" printing press anymore.  So they face actual hard decisions.  America, Britain, and Japan (which would be WAY to the far right of the European states at 200% debt to GDP) are happy to go the backdoor route - rather than deal with the issues at hand they are happy to print money. [Jan 13, 2010: Kyle Bass of Haman Capital - Japan Defaults on Debt or Devalues in 3-4 Years; US in 10-12]  Which is why the value of your dollar, over the long run, has been crushed.  And effectively is the basis of inflation.

As investors, here is the other problem.  This is not a 1 week issue, or 1 month, or 1 year.  These are issues that will be hanging over us constantly.  We've been discussing them (specific to the US) since 2007 inception.  We've been discussing the European issues since mid 2009.  Many months it did not matter one iota - but as we like to say "it matters only when it matters".  Now it matters.  Maybe after the IMF comes in to rescue Greece the market will surge 5% overnight and we'll cheer! Problem solved!  Then what?  Then another decade of more sovereign debt issues - one country after another.  A massive headwind.

Bill Gross weighed in on this issue yesterday on CNBC ... he pretty much sums it up; please see 7 minute video below.  It's so very important to understand this, and how the awful decisions of our leadership - in cahoots with our Federal Reserve is helping to erode the American living standard in a very stealth manner.   We are Greece - but with money trees.

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