The USA & Greece


The above, shows (if you can make out the words, i know it looks ridiculously small) that the US is not going to be the next major economic casualty, after Greece. It just isn’t going to happen.

My knowledge on economics is supremely limited. So please bare that in mind!

Even the UK, which is in a far worse position than the US, is not even slightly as bad as Greece. We here in the UK have had two quarters of positive growth. I accept that given the bail out, and fiscal stimulus package, the growth figures are ridiculously low, but we are in a period of economic recovery. It is going to take a while to see the benefit.

The Office of National Statistics report revised their original estimate for growth in the fourth quarter, to a much higher figure. We are actually in a much stronger economic position in the UK, than we first assumed. Government spending was needed to prop up the economy during recession. But, given that we are still only in recovery, I believe it’d be a massive mistake to withdraw that support as the new Conservative government plans to do shortly. In fact, i’m not entirely sure where the benefit of withdrawing support now, actually is? I accept in the future, we need to cut spending. I think though, forcing tax evading corporations to pay what they owe, should be the prime target. But cutting now, seems dangerous. Surely, when we are a growing economy, and the World itself is growing economically, that then would be a good time to cut. Not when people are struggling the most. I fear that it is just Tories being Tories. Cut spending, give people the option “Work where ever we say, or lose your home and starve to death…… and work twice as hard, for minimum wage…lower if we had our way!!! Whilst we give your boss a tax cut, so he can enjoy another game of golf a week“, and eventually the Nation’s money pot may improve, at the expense of social cohesion and morale.

Fox News today asked if it were possible, that the U.S could become Greece economically. They all answered “yes“. Scare tactics.
So I did some research, on the fundamental differences between the economy of Greece and the economy of the US.

To fill the hole in the budget, both Greece and the US need to find around 6% of GDP, according to a report by economists Auerbach and Gale. My limited understanding of economics tells me that just because that number is true for both Nations, the measures needed to fill the gap, are nothing like one another.

Greece’s budget deficit is 14% of it’s GDP. America’s is 9.3%. They are both pretty harsh figures, I accept.

National debt in the US is apparently likely to hit 140% of GDP in the next twenty years. That doesn’t take into account policy changes, technology advancements, or any other sort of externality. It does not take into account growth as a result of investment in infrastructure etc. That figure simply goes by what it would be, if twenty years from now, were the same in every way, as today.

Spending cuts, tax raises are obvious. But they do not need to be harsh as they do in Greece. Greece is in a far worse position. The US’s economy is growing, whilst Greece’s economy is shrinking. In order to protect itself from bankruptcy, by appealing to the IMF for a loan, Greece is being forced to reduce spending. Reducing spending during such a huge recession, is only likely to make that recession far worse. America is not in recession. It does not have to appeal to the IMF for a loan, it is not likely to fall back into recession any time soon. The growth will eventually provide the revenue to fill that 6% gap. When the US economy picks up, then spending cuts and higher taxation will further help the US bring down its cyclical deficit.

The US dollar is still strong. Despite growing deficit and debt levels, the US is in a prime position to deal with its problems, because the dollar will be the leading currency for many many years. America is the largest economy in the World. Greece, is the 27the largest economy in the World. And whilst China is growing, it is not in a position to catch up to, or overtake America for quite some time. Investors simply do not trust the Chinese all that much, whilst at the same time, investors flee Greece. Whilst reserve currency status is not guaranteed to last, it certainly provides protection for the US, which provides 60% of the World’s reserve currency.

Greece has to fill that gap within the next year. If they don’t, they risk pushing Greece into an even greater recession, which will inevitably lead to even greater structural deficits. Greece is in a mess. They ran up huge budget deficits during the good economic times. They inevitably ran up even larger budget deficits during the bad times. Greece’s structural deficit is horrendous. America’s, is not. The structural deficit in the USA is not perfect, true. And it is going to take some harsh measures over the next few years to help. But, the US can fill that 6% gap, over two entire decades. Greece has two years at the very most. It is also worth pointing out, that it was the Republican Party, the party of fiscal responsibility that spent away their budget surplus during the good times. And not in a positive way either. It was not Obama. America needs to simply slow down a little, not drastically cut.

America obviously has to change over the long term, whereas Greece has to change immediately. The problem America has, is its particular brand of Capitalism; irresponsible consumerism. Growth for the benefit of growth. Wall Street offering no real social good. They simply exist to fatten their pockets. Your money, placed in banks, being used in dodgy dealings, rather than productive investments. Responsible Capitalism, in which the success of a Nation is in measuring how low the inequality gap and how low the poverty rate is, rather than the accumulated riches of the very wealthy. That is the only way the entire World will escape another preventable Global recession.

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11 Responses to The USA & Greece

  1. Black Flag says:

    First, one must overcome this issue of definitions.

    Using GNP in a ratio vs. government debt is very deceiving.

    Government spending adds to the GNP. When the government borrows and spends, the GNP rises by definition.

    Thus, the ratio is:

    X+100/Y+100

    …distorts the issue when it is:

    x+1000000000000/y+1000000000000
    ==============

    Next thing to overcome, the debt vs deficit.

    The debt must include the obligations of stuff like Health Care and SS, which for the US approaches $65 trillion of unfunded liability – which exceeds the entire GNP of the world.

    For the US, SS tax exceeded SS payment – and the US government put an IOU (“non-marketable security”) in the SS account and took the money.

    But since 2009, SS payments exceed SS tax. Now the SS fund needs to “cash in” these IOU’s – but the government is already running record $1.5 trillion deficit. SS has to go and borrow money, in competition with the US government and business in the open market.

    US Health Care is going to add another $900 billion in deficit on top of all of this.

    These factors are not added into the rosy American picture.

    True, the US$ went up vs. the EUR – but more importantly, so did gold!

    Gold moves opposite the US$ – when the $ goes, gold goes down and when the $ goes down, Gold goes up.

    But both went up.

    So this does not indicate the US dollar strength at all, but a “rush to safety”. As you surmised, the US$ as a reserve currency appears to be a safer haven then the EUR.

    The US economy is not growing – it registered a -1.9%, after a huge stimulus. Keynesian economics has run its course.

    ==============

    To put into perspective the US situation;

    The deficit (not just the budget, but what had to be borrowed over and above revenue) for the USA is $1.5 trillion.

    There are 330 million people in the USA. Average pre-tax income of $55,000.

    The ONE YEAR deficit is ~$5,000 for every man, woman and child in the USA, or $20,000 for an average family.

    This is almost half of the PRE-tax income of a family – and represents 60% of the POST-tax income of a family. Remember, this is the DEFICIT, not the debt, nor the total of the US budget (not including municipal, and state governments either).

    This is going to happen every year (or more) for the foreseeable future.

    The outstanding US government debt and obligation of $65 trillion represents mind-blowing $215,000 for every man woman and child – or a unimaginable $860,000 per family.

    With only $33,000 post-tax per average family, $20,000 of that lost to the deficit, $10,000 remaining is left for the family expenses AND THE OUTSTANDING OBLIGATIONS.

    This is the definition of IMPOSSIBLE.

    This absolutely no way for the US to grow out of this. It is insurmountable.

    Even if the US cut their budget in half (down to $2 trillion), and run a surplus – it would only be $250 billion/yr. – it would have to maintain this for 150 years.

    It is inconceivable that any government could hold the line for 150 years.

    And THERE IS NO WAY the US could cut its budget by 50%. It can’t even cut the budget by 0.01% ~!!!!

    Impossible.

    If the American’s *somehow* doubled their productivity (and hence, real income), that is 100% growth… the average American wage to $110,000 –

    ** they still could not afford to pay off the $65 trillion out of that cash flow!! **

    And there is no way you can imagine the US to suddenly grow by 100% – its economy is shrinking.

    ==============

    No cuts are possible. Look at Greece. No cuts have happened at all!!! None!!

    And the country riots.

    Do you really believe the government can ACTUALLY cut a thing?

    The Greek government is lying. They’ve been paid off. They will bet they will be paid off again, and again and again.

    One day, they will not get paid off, and the nation will burn.

    The US government cannot cut. 75% of Americans receive some sort of government money. Everyone wants the other guy to suffer the cut backs, but the other guy is as numerous a group as any of the groups.

    No cuts will be made.

    Eventually, the game will end and the US cities will burn.

    The global economy, destroyed by Socialist government policy, is doomed.

    You are man falling without a parachute watching the world rush up to you. You can flap your arms all you want…. the end will be crushing.

    There is no avoiding the Reckoning. The future will be bleak.

    It will be either (1) a Great, generation-length Depression with staggering unemployment and economic stagnation for 10 or more years

    or

    (2) a global hyper-inflation. If this happens, it will mean the end of Western civilization. Hundreds of millions of people will die. You will probably die, I will probably die.

  2. Will we all die before or after the World Cup? Because if I just bought an England football shirt for nothing, i’m going to really get annoyed.

  3. Black Flag says:

    You are safe to wear your shirt!

    However….

    … remember the Law of Economics.

    If I knew *tomorrow* the market will collapse, I will act on that !today!, which will cause the market to collapse today.

    What this means is the world and the People will *always* be caught by surprise by economic collapse. It is not a slow, obvious, slip into the depths – it is overnight and sudden.

    Keep that in mind as you prepare.

  4. Totally selling my shirt now.

  5. Black Flag says:

    From an original student of Mises and a retired PhD in Economics:

    Hyper-inflation needs causality to occur, it’s not inevitable.

    Certainly the self-interest of central bankers would be violated by hyper-inflation, but not just for personal pension reasons.

    Hyper-inflation would destroy government manipulated money and the continuation of their banking school racket.

    Why would they do this when other alternatives and edicts are available to them, such as direct credit and price controls?

    Of course the result is depression and a massive destruction of accumulated wealth, but which would be the greater incentive to central bankers?

    Losing their monetary manipulation racket or impoverishment of the general welfare of the citizens?

    I’ve been convinced hyper-inflation would be an irrational act by a central bank since it would be an act of self-destruction.

    There are other fascist choices to be pursued than currency destruction.

    A direct command political order seems more probable, and a more likely future scenario.

    So you can probably keep the shirt – it may become an item of barter in the Generations-long Depression….

  6. jay says:

    There’s a lot of bullshit in economics. Luxemburg owes 4974% of its GDP, Monaco 1844%. Most of the European countries sparing money to help Greece owe MORE money than Greece. Bullshit.

  7. Black Flag says:

    Jay,
    Luxembourg:
    Public debt 14.5% of GDP

    Which is *hardly* close to 4,974% of GNP.

    You are confusing GOVERNMENT or Sovereign debt with FINANCIAL debt of businesses, corporations, individuals, banks and government.

  8. Black Flag says:

    PS: The reason Luxembourg appears to have such an external debt is because it is a global finance centre.

    This is to be expected.

    Debt issued for wealth creation is “good” debt – it is sustainable, for it returns income (ROI).

    Government debt is not sustainable. It is money paid, typically, to under-performing assets (which is why they get money from government – because they are in trouble and no one else is stupid enough to give them money).

    Simply put, government money is good ‘future’ money being destroyed by present bad money.

    The economic crisis is due to GOVERNMENT finances, where Greece —
    Public debt $405.7 billion (125% of GDP)

  9. Black Flag says:

    Jay,

    But to your point, the web of cross-debt is why this crisis of a small stupid country is potentially disastrous.

    http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html?ref=global

  10. Black Flag says:

    Jay,

    Consider Switzerland – a pristine example of economic stability has $1.339 trillion of “external” debt or +2,700% GNP.

    Again, as a Global Financial Centre, this is expected.

    Be careful of what financial number you use to evaluate economic conditions – they do not mean the same thing.

  11. […] The USA & Greece “ Futile Democracy By futiledemocracy To fill the hole in the budget, both Greece and the US need to find around 6% of GDP, according to a report by economists Auerbach and Gale. My limited understanding of economics tells me that just because that number is true for both … futiledemocracy.wordpress.com/2010/05/13/the-usa-greece/ […]

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