Wednesday, December 8, 2010

Chinese Central Bank Adviser: U.S. Fiscal Health Worse than Europe's

In what should come as no surprise to anyone who does not share characteristics of an ostrich on a sandy beach, an adviser to the Chinese central bank says the fiscal condition in the U.S. is worse than Europe; but for now all attention is focused on the continent, letting Americans run wild as unruly teenagers.  I've posted a chart many times of where the U.S. would stand if it were in the European Union, and aside from Greece we're near the top of a chart we don't want to be leading.  [Feb 5, 2010: Sovereign Risk Chart - Where Would the US Fit in, on Europe's Scale]   This is almost a year old so I am sure the country's movement on the chart has only gotten worse.... heck we just added $900B of debt in the next 2 years, yesterday alone.

So who accompanies us in the cluster top of the chart?  Spain, Ireland, and the UK.  We know what happened to the Irish, and we know the pressure being borne on Spain.  The UK, like the US can never technically default as it can print money up the wazoo and crush its currency (the long term US plan apparently) - but instead chose in recent elections to go the route of cutting back on spending and making many difficult decisions.  [Oct 21, 2010: UK Unveils Serious Austerity Measures - Potentially Slashing Half a Million Public Workers]  Now while true you don't want to be doing these sort of stark cuts in a recession errr, burgeoning recovery as we have in the U.S. - there is not even a framework in place to attach any long term issues domestically.  (In this case the UK most likely should have announced their stark initiatives but postponed them out 2 years or so - but we'll see how it works out for them).  We'll see what 2011 brings to the U.S. - talk is Obama is going to try to bring in some of the components of the deficit commission for serious discussion, but somehow I think almost all the 'solutions' with any meaningful impact will be things with date targets of 2040 or 2050, which again - only kicks the can.  Anything nearer term will most likely be for show only.

As an aside, this movement of debt from the private balance sheet to the public that has engulfed the globe the past 3 years has mostly benefits bondholders which in large part are banks.  It always comes back to the banks.  You may not remember Iceland... which does have its own currency, but actually was Greece before Greece.  Most of its debt was held by the British banks... and Britain wanted Iceland to accept more debt (because as we all know, if there is one way to combat a debt issue, it is to accept more debt - ask Greece or Ireland) - so that in the short run Iceland could pay off the debts owed to British banks.  Instead Iceland told Britain to stuff it, they were not going to put 50 generations worth of debt  on its people just so the global banking oligarchy would not take haircuts on their bond purchases.   So (sniffle) the British banks took losses - mercy, they suffered from their bad investment decisions.  Having their own currency, Iceland devalued it sharply (which is not a great thing either) - but it was a choice of 1 time short term pain, or walking around as a zombie for decades ala the Japan solution.  They chose the dramatic up front pain, but as of the past week Iceland has emerged from recession without the generations of debt that its people will have to service so that foreign banks (ala bondholders) can never suffer a loss.

Which is the same thing Greece could have done... or Ireland... or Spain... or Portugal.... or the U.S.....  but since these countries believe that the banking oligarchy must never take pain and the taxpayer should make the bondholder whole - the taxpayers shall suffer for generations.  It is more complicated than that (i.e. at this point could German and French banks take 20-30-40% haircuts on Spanish debt without imploding the European banking system?) but that's the gist of the decisions being made worldwide.  Unlike you and I, who can lose money when we make stupid investments, apparently bondholders no longer have to face such issues.  Unless you buy Icelandic debt.

Meanwhile back on the home front, China 'hates us' for what we are doing to fix our problems, [Feb 13, 2009: - China to U.S. - We Hate You Guys] but certainly is not blind.

Via Reuters:
  • The U.S. dollar will be a safe investment for the next six to 12 months because global markets are focused on the euro zone's troubles but America's fiscal health is worse than Europe's, an adviser to the Chinese central bank said on Wednesday.
  • Li Daokui, an academic member of the central bank's monetary policy committee, said that U.S. bond prices and the dollar would fall when the European economic situation stabilized.
  • "For now, market attention is still on Europe and for the coming 6-12 months, it will not shift to the United States," Li said, when asked about U.S. President Barack Obama's plan to extend tax cuts for all Americans.
  • "But we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe. In one or two years, when the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, U.S. Treasury bonds and the dollar will experience considerable declines."
  • U.S. Treasury prices fell sharply for a second day on Wednesday as the proposed tax deal sparked concerns over the government's ability to service its massive debt burden. 
  • Moody's Investors Service said it is worried the tax cuts could become permanent, hurting U.S. finances and credit ratings in the long run.
  • In Europe, Ireland's parliament passed the first in a series of resolutions underpinning its 2011 austerity budget on Tuesday, marking the first step in a lengthy approval process. But investors are now worried that the region's debt crisis could engulf Portugal next, or Spain.
  • China has a big stake in the performance of dollar assets. The country holds the world's biggest stock pile of foreign exchange reserves at $2.64 trillion and an estimated two-thirds of that is invested in dollar assets, including U.S. Treasuries.
  • Li was speaking on the sidelines of a financial forum in Beijing. He sits on the monetary policy committee of the central bank but does not have real influence on key decisions on interest rates and the yuan.

One last point, one thing I'd like to point out in the chart at the top of the page... look who is sitting right next to Portugal at 80% debt to GDP.  One of the 2 countries which is supposed to be the backbone of the EU, and providing funds to bailout everyone else.  If you think a Spanish bailout will cause heck, just wait until the vigilantes visit France.  Which is why before I think it is all said and done, the ECB is going to be printing money as if Ben Bernanke is at the controls - or the EU will suffer critical fissures.  So the EU issues are going to be with us for a very long time....and why I continue to say NOTHING has been solved in Europe until bondholders begin to suffer losses.  All we have done is move the debt from under one shell to another - no different than the U.S.

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