Grecian tragedy - a sideshow to the main event

The following excerpt comes from a very good article written by Justin Webb who was the BBC's North American editor for eight years.

America's federal government debt is growing at $40,000 per second. It has reached $14 trillion, whatever that means. More comprehensible perhaps is this fact: the debt will soon match the entire GDP of the United States. Outside wartime, that has never happened before.

A combination of tax cuts and spending increases, coupled with the war on terror and the financial meltdown, has seen America's fiscal health evaporate.
Even the savings implied last week in the surge home of US troops from Afghanistan, count for little more than a drop - a splash, perhaps - in this ocean of debt.
The real issue is the future of America's domestic spending.

The projections are appalling: the non-partisan Congressional Budget Office thinks that by 2030 interest payments plus spending on pensions and health will take up all the government's tax income. Everything else, from education to war-fighting, will have to be borrowed for. Or cut out.

Distribution of High Net Worth Individuals

Source and document here

Heads we win, tails you lose

The good news for lawyers advising the ECB and EZ ministers is that they may just have figured out how to roll over Greek debt without triggering a credit event or default in the near term.

The bad news for many banks, especially those in the US and UK according to some reports (for example here), is that the CDS contracts which were supposed to insure them against any debt re-structuring may not be worth the paper that they are written on.

In the meantime they will just have to sit on deteriorating collateral, for which there are no bids. But from the bankers point of view the end game of course will be that should the whole EZ sovereign turn out as badly as many fear, it will be deemed to be another TBTF risk and the inter-generational theft wheeze will continue.

Variations on a moral hazard theme

Contrast these two scenarios:

A medical doctor says that a patient has a life threatening condition and that unless the person suffering receives immediate treatment there is no chance of recovery. The patient and his/her family and friends will almost invariably make all of the necessary arrangements to bring about the changes required.

A leading central banker- the BOE's Mervyn King as reported here - says that essentially the problems with EZ peripheral debt are based on insolvency and not liquidity. That, in effect, extending new credit to an insolvent sovereign will simply add to the magnitude of the default when it occurs. But rather than listen to a prudent central banker (sorry but that is almost an oxymoron), the ECB and EZ leaders stand ready to shovel another Eu 120 billion to add on to the approximately Eu 200 billion that the ECB will have to write off when Greece fails.

Moral of the story is hazardous (excuse the play on words) to the public purse.

Euro politicians cannot fool markets

The "founding fathers" of the European project and the bloated edifice of incumbents in Brussels will do their utmost to push towards greater integration...otherwise they would have to get real jobs. Politicians are quite adept at riding the apathy of their electorates and managing to fool most of the people most of the time- so who knows they just might be able to get a more federal system accepted by stealth

The one constituency that politicians are not good at mystifying are market traders and when the true extent of the shaky finances of the Euro system are revealed (useful to see BOE now insisting on greater transparency in this respect) it may well be that the integrationists will not have time to prevent an unravelling of the EZ.

Fed is in a fiscal box aka double bind

This excerpt appeared here, and is included without comment

Right now, thanks in large part to Federal Reserve policy, Uncle Sam can borrow at an average cost of just 2.5 percent. The average borrowing cost over the last three decades was 5.7 percent. Our debt is now $14 trillion and scheduled to grow to $25 trillion by the end of the decade. If interest rates normalize over that period the added interest costs in 2021 alone will be $800 billion—more than 20 times the mere $37 billion in budget cuts that tore up Congress in March. It would take virtually all of the cuts in the Ryan budget just to cover that added interest, much less to start bringing down the national debt. Unfortunately, the Fed is now in a fiscal box. A normalization of interest rates would break the Treasury. Hence, a normalization of rates really can't happen—we're stuck in a world in which the Fed must keep rates artificially low in order to prevent a budget disaster.