A question on fundamental analysis. The latest issue of The Economist, one of my favorite magazines, has the cover story on Debt - The Biggest Bill in History.
It begins: "THE worst global economic storm since the 1930s may be beginning to clear, but another cloud already looms on the financial horizon: massive public debt. Across the rich world governments are borrowing vast amounts as the recession reduces tax revenue and spending mounts—on bail-outs, unemployment benefits and stimulus plans. New figures from economists at the IMF suggest that the public debt of the ten leading rich countries will rise from 78% of GDP in 2007 to 114% by 2014. These governments will then owe around $50,000 for every one of their citizens."
The governments, says The Economist, will have three options - to manage, default, or inflate. Apparently there is a danger of a default in some smaller European economies, but in the US the danger is inflation.
My first thought - gold, anyone? My second thought - are these numbers really that bad? Comparing them to my personal situation, my first thought is that my own 'consumer debt' is zero, but on the second thought, my mortgage is more than a year's income - which does not bother me one bit. If I can manage it, why can't the country?..
If you have a fundamental view of the national debt situation, please share it and post your reply.
Alex Elder
www.usdebtclock.org For a very interesting view on the debt load across many categories.
ReplyDeleteGordy
The problem is that this whole mess is a consequence of the decoupling of the origination and ownership of debt.
ReplyDeleteSecuritisation has weakened the risk management controls. If you can bundle the loan and off load it to someone else for a commission the incentive is to bundle as many as you can regardless of the probability of default.
The party ends when the perrson buying the loans realises he is being played as a stooge and stops buying. By then its too late as they have bought worthless loans and have lost real capital.
Government Debt is creating a burden on future tax payers while the benefits are going to bail out the recklessly overgeared current spenders.
The American nation arose out of the principle of no taxation without representation.
Who is representing our children and their grand children from the consequencs of the current inhabitants of "Squanderville" as Warren Buffett so aptly describes American society?
To put it more succinctly, its a matter of intergenerational equity. Imagine that Alex suffers a midlife crisis and sells his home and uses the equity plus borrows to the hilt from the family company to buy himself a super yacht to while away his days on the high seas.
ReplyDeleteA Hurricane strikes and all are lost at sea. The family company passes to his daughter who now has to run the company to service the debt on the now "sunk" asset.
She is now left with the debt burden without ever receiving any of the benefits.
How would you like to be remembered by your descendents?
This topic is very controversial. Rational arguments don’t always work.
ReplyDeleteThe IMF(1) shows that the 2008 USA gross debt as percentage of the GDP is hardly greater than the one of France, Germany or Canada1, three countries which have never been criticized as much as the economists have been doing for years about the indebtedness policy of the American government.
More intriguing is Japan with a gross debt of 196%(1) in 2008 whereas its currency has remained very strong in a deflationary environment.
What is interesting with United Kingdom is the fact that the debt was only 52%(1) of the GDP in 2008 and nevertheless it received a warning about its credit quotation a few weeks ago whereas this country has one of the biggest potential of indebtedness.
Therefore, we can wonder what is the most important thing for a country to remain credible from a financial perspective. Economics is not an exact science and maybe revenues are not the only aspect which matters.
I believe that the wide diversification of the American economy, the turning to the new industries and the strong military sector will support an increase of the debt. In the long run, whether the USD depreciates, it could be more the consequence of the competition of the Chinese and Indian currencies coming from two rising super-powers rather than a big debt and the resulting inflation.
(1) World economic outlook (WEO) –Crisis and recovery April 2009, see page 203
I subscribe to the American Institute of Economic Research (AIER), a not-for-profit without advertising so I think they're a bit more believable than most periodicals. Their conclusion on this topic, in an article dated 4/22/09, is as follows:
ReplyDeleteThe currently lingering gears of price inflation will very likely be transformed in the not too distant future into the reality of rising price inflation.
TIPS anyone?
Hi Alex,
ReplyDeleteI remember back in our Traders Camp in 2004 you talked about a book about the USD and the point of the book was the dollar was going to go to severe historic lows...I argued with you on this premise at the time based on the long term charts and fundamental outlook at that time...Now the times have changed! I want to buy this book but can't remember the title...
I am taking a class this summer for my MBA on money and markets and my professor who is retiring lets his opinion be known. He thinks it is going to end badly and he has been around a long time! He thinks the recession will double dip.
I don't have a crystal ball, but I think the dollar is going to crash at some point, gold is going to advance and the economy is going to go back to the 70's! I am not talking about disco dancing and bell bottom pants but stagflation!
I can't remember what caused stagflation only the cure was quite painful! All I can see with fiscal policy from Obama is craziness! This policy is not sound footing for a sustained period of economic growth! Monetary policy is pushing on string and running the printing presses at full tilt...
I think it may be time to do some more reading...Interesting times are ahead.
Good Trading,
Eric F