Bad News from the US...

Generali

...for lovers of chaos.

The Donkeys and Elephants of US politics have agreed a budget and a way round the sequester. It looks highly likely that a deal on the debt ceiling will follow imminently.

Interestingly, both sides have given up things that are very important to their core base: the Democrats have given way on extending unemployment insurance and the Republicans have given way on defence spending. That this is a genuine compromise with both sides winning and losing at the same time.

michaels

Care to comment on the long term sustainability of the US fiscal path?

Generali

michaels wrote: »

Care to comment on the long term sustainability of the US fiscal path?

Who me? Yeah it's FUBAR'd.

The great advantage they (just about) have over Europe incl the UK is that their taxes and spending are lower. They are still bankrupt in the long run as they can't afford their promises.

Australia is an interesting case. They are now pretty much paying for their future promises if you can accept that the last Government was an aberration rather than a reversion to the norm. However, what are all those assets held in Super (pension) funds worth if half the world is bust?

vivatifosi

Thanks Gen, I was wondering what had happened. It's interesting how political and economic chaos makes the news but it's resolution doesn't. Speaking of which, I haven't heard much about Greece lately. That can't have resolved itself, surely...

Kennyboy66

vivatifosi wrote: »

Thanks Gen, I was wondering what had happened. It's interesting how political and economic chaos makes the news but it's resolution doesn't. Speaking of which, I haven't heard much about Greece lately. That can't have resolved itself, surely...

If (and its a big if) you exclude interest payments, Greece has eliminated its budget deficit. They can borrow from the IMF or ECB at about 2.5% giving a real budget deficit of just over 4%.

If they had to borrow at market rates, the deficit would be close to 15% (10 year greek bonds pay roughly 9%).

In summary, the patient is stabilised but needs a long, long period of recuperation and growth, while at the same time keeping spending down.

michaels

There was something recently about debt being 'stabilised' at 160% of GDP - even with artificially low interest payments I can't see how that level of debt could ever be handled without further write downs which presumably means the ECB/IMF taking losses as I don't suppose they have many other creditors left.

Generali

michaels wrote: »

There was something recently about debt being 'stabilised' at 160% of GDP - even with artificially low interest payments I can't see how that level of debt could ever be handled without further write downs which presumably means the ECB/IMF taking losses as I don't suppose they have many other creditors left.

The Brits coped with that twice.

The first time was they (effectively) borrowed the money to build an empire and milked the empire for taxes on trade in order to pay it down. The money was borrowed to fight Napoleon and it's not, IMHO, unreasonable to argue that the City of London was as much responsible for his defeats as Nelson and Wellington.

The second time was after WW2 when they swapped debt that had been sold at a then market yield for a yield that was far more attractive to the (Labour) Government. There's an argument as to the fairness of that. If I was a pensioner that had bought an annuity to pay me £20,000 a year and that fell to £10,000 a year because the bonds I bought had been swapped then I'd be pretty miffed.

Of course I could sue my annuity provider but then he'd go bust. I could then ask the Government to bail me out but then the Government would go bust. The Government could sell some debt to an annuity provider but they're all bust!

These days we get round the problem by 'printing money'/QE. I'm not convinced that's a silver bullet.

Tancred

michaels wrote: »

Care to comment on the long term sustainability of the US fiscal path?

The USA can't go bust - it owns most of the wealth in the world!

grizzly1911

Tancred wrote: »

The USA can't go bust - it owns most of the wealth in the world!

Do they exceed its ever growing liabilities?

They do own some dirty assets on the end of missiles and bombs that will probably ensure they don't get rolled over by any individual country. p*ssing off multiple large creditors might not be so easy to mange.

coastline

Government officials say the deal, totalling an estimated $85bn over the next decade, aims to carve $20bn out of the nation's $17 trillion debt.

So whats that....£2bn out of a UK £1.7 trillion debt...

http://www.bbc.co.uk/news/world-us-canada-25327831

Generali

coastline wrote: »

Government officials say the deal, totalling an estimated $85bn over the next decade, aims to carve $20bn out of the nation's $17 trillion debt.

So whats that....£2bn out of a UK £1.7 trillion debt...

http://www.bbc.co.uk/news/world-us-canada-25327831

The point isn't the immediate savings, it's this:

“While modest in scale, this agreement represents a positive step forward by replacing one-time spending cuts with permanent reforms to mandatory spending programs that will produce real, lasting savings,” Speaker John A. Boehner of Ohio said in a statement.



President Obama also weighed in. “This agreement doesn’t include everything I’d like — and I know many Republicans feel the same way. That’s the nature of compromise,” he said. “But it’s a good sign that Democrats and Republicans in Congress were able to come together and break the cycle of shortsighted, crisis-driven decision making to get this done.”

http://www.nytimes.com/2013/12/11/us/politics/party-leaders-indicate-deal-is-reached-on-budget.html?hp&_r=0

That agreement can be reached is more important than the agreement that is reached. IMHO of course.