Tuesday, June 14, 2011

Yikes! How the US is in a worse position than Greece

Greece has become the touchstone for a western economy built on sand and heading toward complete collapse. So it is scary to hear the numbers as to how the future liabilities of the United States are in worse shape than those of Greece. According to Bill Gross, who works for Pimco, (which runs the largest bond fund in the world)speaking on CNBC yesterday, when we count all the money that the U.S. owes including future entitlements, the numbers are devastatingly scary.
Much of the public focus is on the nation's public debt, which is $14.3 trillion. But that doesn't include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures.

The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show.

Taken together, Gross puts the total at "nearly $100 trillion," that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won't find a solution overnight.

"To think that we can reduce that within the space of a year or two is not a realistic assumption," Gross said in a live interview. "That's much more than Greece, that's much more than almost any other developed country. We've got a problem and we have to get after it quickly."
Knowing this, Grass asks a salient question about who is going to buy all that debt.
"Why wouldn't an investor buy Canada with a better balance sheet or Australia with a better balance sheet with interest rates at 1 or 2 or 3 percent higher?" he said. "It simply doesn't make any sense."
If Greece collapses, Germany and other European countries may bail it out. But no country or group of countries would be able to bail the U.S. out if our economy collapsed and we couldn't pay our liabilities.

Ponder that situation for a few scary minutes. Then ponder our nation's leader who is evading that question and then making jokes about how shovel-ready projects weren't actually shovel ready. Many people warned about that at the time, but Obama ignored such warnings because they didn't fit with his ideological certainty about how throwing government money away in stimulus was the right way to spur employment. He figured that Nancy Pelosi and Harry Reid knew best on how to craft such a solution. And now he's joking about how ignorant he was.

Just imagine the jokes he can make when he comes to truly understand the financial calamities we're facing in the not-so-far future.

3 comments:

pumping-irony said...

The truth is Greece and the US are not analagous. Greece's debt is denominated in Euros, a currency which it cannot "print". As long as it wishes to remain part of the EU, it must live with the austerity-induced depression forced upon it by that body. If it were to withdraw, other solutions (default and/or currency devaluation) would be available to it.

In contrast, all US debt is denominated in dollars, which the US govt is the sole source of. It can "print" as many of these as it wants. Thus the US cannot go bankrupt in the usual sense of the word.

Greece's problems are cultural as much as economic. Our problems are largely political; if we can only get the nincompoops out of Washington and many state capitols, we can solve them.

Pat Patterson said...

Gross and PIMCO have been shorting Treasuries for a while and many of their clients are more than unhappy at the losses the have entailed as the company bet wrong. Claiming that the US is in worse shape couldn't possibly have anything to do with needing to create a run on the bonds? Could it?

Clark said...

Strictly speaking, the United States is not "on the hook" for Social Security or Medicare benefits. The Supreme Court has held, for example, that Social Security participants do not have a property interest in their "accounts," and that Congress can change the program--or end it--as it sees fit. See Flemming v. Nestor, 363 U.S. 603 (1960). Until the wrath of pillaged younger citizens outweighs the whines of pensioners, however, Congress will be on the political hook for entitlements, however unsustainable.