Bloom of Doom V: “We have control of the ship, we have a plan”
(See more statistical material in our References section!)
Before we go a little deeper, let us first deconstruct that sooth-saying marvel a little:
- “the ship”: means you’re at sea whereas states should be on solid dry land;
- “control”: being able to navigate a ship doesn’t mean much if you have no safe harbour to return to;
- “plan”: having a plan doesn’t mean it’s going to work.
So, another sentence utterly devoid of meaning used like a shield to deflect the probing halberds of the investing world.
(2010-02-10, 22:50 GMT: this is the second version of this article; country-specific information other than the USA, UK, Ireland, Spain, Greece, China and “the World” is still largely missing [recent additions in bold]; we intend to cover about another two dozen countries in peril. But research on many smaller countries less covered in the media is a tedious job and we want to provide here a convincing synopsis of the whole tragedy – only then will the truth finally “sink in” or so we should think. However, we thought the subject too fascinating and too urgent as not to set it live already. If you read this, and are done with what’s there, come back in a every few days as we progress.)
The captain of the Titanic no doubt had control of his ship and he had a plan. Only he didn’t have enough respect for the iceberg. And the analogy carries much further in a rather uncanny way: didn’t the band still play when by all definitions the Titanic was already a shipwreck beyond all hope? And we haven’t exhausted the analogy yet: like the Titanic which was deemed unsinkable sovereign debt was deemed irreproachable. And like with big ships, by the time you see the iceberg it is already too late to alter course. You may still have time to don your life-vest, but prepare to abandon ship. And like with holed ships, he who stays too long will go down with it. Oh María how farsighted are you! Or is it like Cassandra thou shroudest your message as not to terrify us mortals? How considerate of you! (Who would dare to suspect Spanish nobility ever to be ignorant and not admit it?)
What befuddled me even as a child (indeed! – and make no mistake, many children nowadays, though they may lack the words, feel rather queasy about their future), was that every year the budget went up and debt went up and every year someone with utter conviction would declare that “sometime next year” though they were considering beginning to pay it all back. What was incredible forty or fifty years ago now has turned into an outright farce.
When the lights begin to turn red
This is a table of country default risk as measured by CDS prices from early November 2008:
… as against the end of 2009:
… it looked as if things were getting sharply better … but fast forward to today (February 2010):
… and we’re again seeing deterioration, also with big countries (wasn’t able to find a more comprehensive table yet).
(Source: PIMCO – Marc P. Seidner, CFA: The New Year Rang In with High Spirits: Now the Hangover?)
So let’s just look at some obviously ignored facts as against make-believe or “hope against hope” virtuous strategies country by country (for more statistics and visualisations, go to our Reference Section):
Contrary to “received wisdom” it is now probably riskier to invest in government bonds of the developed (or, shall we say, by and large, OECD) countries:
The West is bankrupt says former Chilean Labor and Social Security Minister Jose Pinera : “Pinera: U.S. Has $100T Debt Problem“:
Before we look at each of the countries below and then the world at large in some detail, let us first clarify how we asses the risk of sovereign default in the first place. Well, no one can ever be sure until after the fact. One home-owner clings to his “underwater” house for dear life, another may walk away and never pay a dime when his rate resets. So it can be a matter of national character, of honour, of anything, like the fear of e.g. losing the next Olympic Games. A country may promise one thing on day one only to opt for another on day two. However, that’s neither here nor there. There is a good proxy measure of a states’ likelihood of default as perceived by knowledgeable market participants and that are the so-called risk spreads which are nothing but the amount of money required (in percent of the principal insured) to “insure” a bond against default. In other words, if the issuer of a bond defaults, it is your credit default swap counterparty that has to foot the bill. If all goes well, then, as with any insurance company, the “insurer” pockets the premium. Look at Wolfram Alpha’s simulation. This is roughly how it works:
Greece (many ships, many plans): Industrial Output Index constantly falling, deficit rising, their total deficit still understated. There’s a plan to “improve competitiveness through structural reforms and provide reliable statistics” – and not before time!
(Source: Greece Economy Watch: “Greece Gets The Green Light, But Will It All Work?” GGB = Greek, SPGB = Spanish, PGB = Portuguese and OBL = “Bund” = Federal Rep. of Germany government bonds)
“Today the question is, will Greece be bailed out by the rest of the countries? The officials of the weaker countries tend to emphasize the solidarity of the union, while the stronger countries make it clear that there will be no bailout.
Yet, the whole debate is misleading: Greece is already being bailed out by the rest of the union. The European Central Bank (ECB) accepts Greek government bonds as collateral for their lending operations. European banks may buy Greek government bonds (now paying a premium in comparison to German bonds of more than 3%) and use these bonds to get a loan from the ECB at 1% interest — a highly profitable deal.
The banks buy the Greek bonds because they know that the ECB will accept these bonds as collateral for new loans. As the interest rate paid to the ECB is lower than the interest received from Greece, there is a demand for these Greek bonds. Without the acceptance of Greek bonds by the ECB as collateral for its loans, Greece would have to pay much higher interest rates than it does now. Greece is, therefore, already being bailed out.
The other countries of the eurozone pay the bill. New euros are, effectively, created by the ECB accepting Greek government bonds as collateral. Greek debts are monetized, and the Greek government spends the money it receives from the bonds to secure support among its population.
Prices start to rise in Greece, and the money flows to other countries, bidding up prices throughout the eurozone.” (Emphasis CrisisMaven) And there’s more: now consider, the ECB in theory only accepts AAA rated bonds. Imagine Greece looses its AAA rating (it should have lost it years ago but who listens to people who understand money nowadays – get a rocket scientist, he knows all about bonuses banking) … all these loans have to be canceled and we have the next crisis withn the crisis!
Ireland (holed ship): “… Ireland is running an unbelievable 1267% [GDP to debt ratio] …” or, in other words, Ireland’s debt is completely irredeemable. Where these rating agencies get their wisdom from is utterly inconceivable.
China (not all ship-shape, “the mother of all black swans“): “The idea that massive levels of reserves are a guarantor of economic stability is, in other words, based on a profound misunderstanding both of history and of the nature of reserves.” “‘Dubai times 1,000 — or worse,’ [Chanos] frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent. ‘Bubbles are best identified by credit excesses, not valuation excesses,’ he said in a recent appearance on CNBC. ‘And there’s no bigger credit excess than in China.’” Coincidentally that is along similar lines as CrisisMaven has argued since over twenty years when the Soviet union collapsed – the central planning and inefficient socialist economy is by and large similar, but China is a Soviet union without natural resources to speak of when comparing per capita natural wealth of Russia and of China!
The EU or European Union (a veritable fleet of sinking ships all men on the pumps): as Der SPIEGEL writes
“An EU Protectorate: The problems facing Greece are just the beginning. The countries belonging to Europe’s common currency zone are drifting further and further apart, and national bankruptcies are a distinct possibility. … ‘The euro should really be called the Icarus,’ [Wilhelm] Hankel suggested back then. He predicted the currency would meet the same end as the hero of Greek legend … State bankruptcies are seen as a possibility. … Experts close to Economic and Monetary Affairs Commissioner Joaquín Almunia say nearly every participating country is compromising the cohesion and stability of the common currency. … ‘The combination of decreasing competitiveness and excessive accumulation of national debt is alarming,’ the experts wrote in a recent report, … France must also get its significant welfare and unemployment expenses under control. … [It's still getting better:] ‘The Greek crisis has German roots,’ says Heiner Flassbeck, chief economist at the United Nations Conference on Trade and Development (UNCTAD), in Geneva. … EU officials … accuse Germany more than any other country of gaining advantages for itself at its neighbors’ expense, using its policy of low wages to make German products increasingly attractive relative to those from other countries. [Even though Germany has a minimum wage regime and high unemployment which rather speaks against "too low" wages - it wouldn't also be higher productivity by any chance?] After all, he reasons, Germany funded the deficits with its surpluses. [Which of course didn't create a moral hazard nor a bubble.] … It was far from secret that Greece had been cooking its books for years. … An alternative would be bilateral financial aid. Solvent countries, such as Germany, would take out loans on the financial market at good rates and pass these on to Greece. [Which would stump markets to finally see EU finances as a basket case and risk premiums would further accelerate.] If Greece doesn’t stabilize in the coming weeks, the euro-zone’s leaders will be left facing a choice between a rock and a hard place, with the third option being even worse. [CrisisMaven's opinion: they'll try all three ...] (Emphasis and square brackets CrisisMaven)”
United States of America (airship – “the sky’s the limit”, iceberg ahead, already ordered it to change course): There are (at least!) “20 Reasons Why The U.S. Economy Is Dying And Is Simply Not Going To Recover” (we’re not using the same numbering system here):
- “The Housing/Credit crisis and Why there is more to come” (“Well, the ‘second wave’ of mortgage defaults is on the way and there is simply no way that we are going to be able to avoid it. A huge mountain of mortgages is going to reset starting in 2010, and once those mortgage payments go up there are once again going to be millions of people who simply cannot pay their mortgages.”)
(Source: The Daily Reckoning – Jim Nelson: The Second Wave of Mortgage Defaults)
Mortgage modification programs on the other hand haven’t achieved a fraction of the originally announced results:
“The new president climbed aboard Air Force One a year ago for a trip to Phoenix to reveal his strategy for attacking the housing crisis … Obama told a cheering audience of high school students, [it] keep as many as 9 million people in their homes by lowering their monthly mortgage payments … Treasury Secretary Timothy Geithner saying things like, “You’ll start to see the effects quite quickly.” …
The numbers show a program that failed to deliver. About 116,000 homeowners have had their loans modified to reduce their monthly payments, the Treasury Department said Wednesday. Only about $15 million in incentive money has been paid to more than 100 participating mortgage companies. That’s 0.02 percent of the $75 billion available.
… To implement the program, it took months to hire and train thousands of new workers — many of whom had no previous experience in the mortgage industry.
The economy also worsened. Unemployment soared to 10 percent, and home prices continued to fall, especially in Arizona, California, Florida and Nevada. Nearly 16 million homeowners nationwide now owe more to the bank than their properties are worth, according to Moody’s Economy.com.
… now raise doubts about whether the government can fix the housing crisis. Low interest rates and tax incentives have boosted home sales, but are ending soon. …
hundreds of thousands of foreclosed homes will hit the market this year, depressing prices even more.
“Realistically, we still have massive problems. When exactly are we going to deal with it?” said Christopher Thornberg, a Los Angeles economist who long warned that the housing bubble would burst.
… An increasing number of people are opting to walk away from mortgages because they owe more on their mortgages than their homes are currently worth. That could cause home prices, which stabilized last year, to sink again.
Since the program started in March :
_1 million people have entered the modification program, and almost 12 percent, or 116,000, have completed the process.
_A third of homeowners who made the three monthly trial payments on time have now fallen behind.
_More than 61,000 homeowners have dropped out, and hundreds of thousands more are expected to do so in the coming months.
_About 220,000 homeowners whose homes have plummeted in value have refinanced.
The process has been time-consuming, bureaucratic and fraught with communication mistakes. …
Faced with poor results last summer, the Obama administration pressured mortgage companies [didn't that initially lead to the crisis???]. … The industry was given strict orders: Sign up at least 500,000 borrowers by Nov. 1.
To meet that goal, most companies allowed homeowners to enroll in the program without proof of income [didn't that initially lead to the crisis???]. That was the same low standard that lenders used when they made some of the riskiest loans that fueled the housing frenzy.
… Many don’t comply, despite repeated phone calls, mailings and even in-person visits by notaries.
It’s a problem that has perplexed and frustrated industry executives. “Borrowers didn’t understand that if they didn’t send the documents in, they would fail to qualify,” said Sanjiv Das, Citigroup’s top mortgage executive.”(Emphasis CrisisMaven)
(Source: ALAN ZIBEL (AP): “A year later, reality sets in on housing“)
- Tighter lending standards – “FHA plans to require borrowers to produce more cash for down payments” and the overall debt of society at large:
- Ailing job market: “1 million Americans give up on job searches”
- Depression in cities: “Unemployment Is Now At 45 Percent In Detroit“
- Unemployment funds are running dry:
- “37 million Americans now receive food stamps, and the program is expanding at a pace of about 20,000 people a day.”
- Bankruptcies skyrocketing:
- Decline of the dollar as global reserve currency: creditor countries remixing their foreign reserves.This process has already begun and some see the dollar’s demise by 2018, some even earlier (it had to end that way, after Nixon in 1971 drove its intrinsic value to exactly zero by sleight of hand):
Russia Today Channel: Max Keiser: Dollar to be buried way before 2018
(Hat Tip: More of Everything Blog: “Max Keiser: Dollar to be buried way before 2018“)
See also: Russia Today Channel: “Robert Fisk reveals truth behind ‘dollar demise’ report“:
- “Jefferson County, Alabama is on the brink of what would be the largest government bankruptcy in the history of the United States – surpassing the 1994 filing by Southern California’s Orange County.”
- Pensions are unfunded to the tune of 3.2 trillion US dollars while outrageous payments are made.
- Social Security & Medicare Crisis: Medicare & Medicaid are underfunded by a staggering 54 (fifty-four) trillion US dollars!
(Source: The Heritage Foundation – Repealing Tax Cuts and Not Fixing AMT Won’t Balance the Budget)
- Hat Tip caazone
(Source: The Heritage Foundation – Liabilities of Entitlement Programs Dwarf Recent Bailout Spending)
This is on an upward roller-coaster which equally cannot be stopped – all the entitled stakeholders will simply see the system stop paying one day in the not so distant future (how’s that for all-encompassing health care?): “Medicare and Medicaid Spending Will Rise with Increasing Health Care Costs“. The shortfall cannot be compensated by the system itself, i.e. the people paying because they later get something back – their ratio has steadily declined to almost zero levels (putting it bluntly):
- Federal debt out of control which is not going to be paid back, at least not if tax receipts against mandatory expenditures are any guide (what else?):
(Source: The Heritage Foundation – Federal Spending Is Growing Faster Than Federal Revenue)
And make no mistake, that’s never again going to change until the final curtain: “Federal Spending Has Increased Steadily Regardless of Congressional Leadership“. Because … legally you can’t turn the clock back: “Mandatory Spending Has Increased Five Times Faster Than Discretionary Spending“.
All one can do instead is inflate and rob everyone (except the gold owners which thus might be disposessed as under Rossevelt 1933 and not repealed until 1975 in the freest, for which the Latin would be: most liberal, country of the world) of their savings (q.v. Credit Writedowns - Inflation: The strategy that dare not state its name, Posted by Marshall Auerback on 8 May 2009):
“… the the dirty little secret is that inflation is the way out of the debt trap, along with dollar weakness. Both reduce the real cost of debt servicing. … The private sector will wish to raise their holdings in government bonds only if they perceive risk adjusted returns elsewhere are less attractive – yet this is antithetical to the very purpose of quantitative easing, which is to break the high liquidity preference of private investors by “trashing cash” and lowering the yield on default free government bonds. In other words, even before we get to the day when quantitative easing is removed, when investors face the likely renormalization of policy rates and the removal of implicit ceilings on government bond yields, there is a glaring inconsistency in the QE approach which no one seems to have noticed. … Basically, the Fed wants to inflate our way out of this depression – that’s the dirty little secret. There is really no other policy choice because the mountain of debt in the United States is immense. … The problem with this inflationary policy response is that it invites a currency and asset revulsion … ” (Emphasis CrisisMaven)
(Source: The Heritage Foundation – Entitlements Alone Will Eclipse Historical Tax Levels by 2052)
Minyanville has this article: “US Sovereign Credit Risk and Inflation” “The bond market vigilantes of yore have returned to the credit default swap market. They see governments worldwide as revving up the printing presses to pay off the nominal bad debts they acquired from the private sector. A debt paid via inflation is a debt repudiated. We’re going to see this struggle between governments and their creditors play out in 2010 and maybe longer. It might not be very pretty.” (Emphasis CrisisMaven)
Look at the ratio of US federal states’ debt and their (already overstated) Gross Domestic Product (GDP):
Rank State Private sector employment (000s) State & local government employment (000s) Medicaid enrollment (000s) Combined ratio1(%) 1 New Mexico 623 160 407 97.5 2 Mississippi 858 223 531 94.3 3 New York 7,118 1,386 4,140 82.5 4 Louisiana 1,550 327 860 81.9 5 California 11,790 2,148 6,524 78.1 6 West Virginia 596 120 307 76.7 7 Tennessee 2,231 373 1,237 76.3 8 Arkansas 965 187 488 74.8 9 Alabama 1,521 322 698 72.3 10 Kentucky 1,462 272 699 71.0 11 Arizona 1,989 352 969 70.8 12 Vermont 244 39 123 70.4 13 Oklahoma 1,227 271 522 70.1 14 Maine 516 76 254 67.6 15 Michigan 3,241 528 1,526 67.5 16 South Carolina 1,520 296 643 66.7 17 Hawaii 469 86 192 64.0 18 Georgia 3,192 576 1,267 62.3 19 North Carolina 3,238 618 1,238 62.1 20 Washington 2,340 445 886 61.6 21 Alaska 263 63 83 61.4 22 Illinois 4,860 729 2,043 60.8 23 Idaho 511 98 175 58.3 24 Ohio 4,367 670 1,653 57.0 26 Wyoming 228 58 56 56.3 25 Texas 8,566 1,553 2,883 56.3 27 Florida 6,199 993 2,152 54.7 28 Pennsylvania 4,895 591 1,926 54.4 29 Delaware 357 51 129 54.0 30 Rhode Island 405 47 159 53.7 31 Indiana 2,391 376 806 53.4 32 Massachusetts 2,796 342 1,046 52.7 33 Missouri 2,282 358 751 52.5 34 Wisconsin 2,378 364 755 50.9 35 South Dakota 337 63 91 50.1 36 Connecticut 1,389 211 431 50.1 37 Oregon 1,339 249 356 49.9 38 Iowa 1,235 214 335 48.8 39 Kansas 1,082 214 254 48.1 40 District Of Columbia 461 53 153 47.7 41 Minnesota 2,270 357 602 46.2 42 Nebraska 785 146 177 45.8 43 Maryland 2,072 339 520 45.6 44 Montana 363 70 78 45.5 45 New Jersey 3,329 545 781 44.0 46 Virginia 2,973 504 666 43.6 47 Colorado 1,884 320 407 42.9 48 North Dakota 296 59 52 42.3 49 Utah 992 167 203 41.5 50 New Hampshire 548 77 114 38.3 51 Nevada 1,025 131 189 34.51 (1.25 x state and local government employees + Medicaid recipients)/private sector employment.Sources: BLS; Statehealthfacts.org
(Source: FORBES.com - William Baldwin, Kurt Badenhausen: America’s Most Beastly Tax Burdens)
- State debt equally unpayable: (see interactive FORBES graphic)
(Source: The Heritage Foundation – Total Government Spending More Than Doubled Since 1965)
Roubini Global Economics/Global Macro EconoMonitor: “Insolvent European vs American States“: “You Can’t Put Lipstick on These PIGS: California Budget gap (as a % of the total budget): 22% Gap: $22.2 billion, New York Budget gap (as a % of the total budget): 9.8% Gap: $5.5 billion, Florida Budget gap (as a % of the total budget): 19.9% Gap: $5.1 billion, New Jersey Budget gap (as a % of the total budget): 7.7% Gap: $2.5 billion, Arizona Budget gap (as a % of the total budget): 19.9% Gap: $2 billion, Nevada Budget gap (as a % of the total budget): 16% Gap: $1.2 billion … All by itself, the insolvent nation-state of California is the 8th largest economy in the world. It’s the size of France. According to the CIA Factbook, Greece is number 34. That is a lot of hyperventilating about a relatively small impact to global GDP. Italy is 11, Spain is 13, Portugal is 50, and Ireland is 56. Additionally, in the US, we have 43 of the 50 states in some form of financial distress.” (Italics CrisisMaven)
Of course there are people close to each respective government who rather see light at the end of the tunnel, but even they admit: “Both the Congressional Budget Office and the Office of Management and Budget project high deficits through 2019, the latest year for which they offer official estimates. It can be debated whether these projections are likely to come true and whether the predicted levels are high enough to cause great harm—but the weight of opinion is currently that the deficit predictions are more likely optimistic than pessimistic. What isn’t seriously debated is the fact that we have a long-term structural problem of the cost of government programs outstripping revenues, and that it is a problem we will have to address sooner or later.” (Emphasis CrisisMaven)
Source: Center for American Progress -”Michael Ettlinger and Michael Linden: Deal with It – A Guide to the Federal Deficit and Debt“
- “The Federal Reserve bought approximately 80 percent of all U.S. Treasury securities issued in 2009. In other words, the U.S. government is now being financed by a massive Ponzi scheme. … It Is Now Mathematically Impossible To Pay Off The U.S. National Debt” … “According to the 2008 Financial Report of the United States Government [Next Report February 2010], which is an official United States government report, the total liabilities of the United States government, including future social security and medicare payments that the U.S. government is already committed to pay out, now exceed 65 TRILLION dollars. This amount is more than the entire GDP of the whole world.” (Quoted from: The Economic Collapse)
And these bonds may eventually fall like a stone: (Bloomberg) Michael Patterson and Cordell Eddings: “Taleb Says ‘Every Human’ Should Short U.S. Treasuries” Feb. 4 , video here: “Session Video Recording. Investments: Where is the Money in 2010 – What are the Risks?“.
- Monetary inflation never before known in human history (and maybe the galaxy).
- … and don’t mention the war!
- Subsidies for unsustainable and unnecessary, no, in some cases outright harmful projects.
Dubai (Ship? Ha, we can ski in the desert!): Who in his right mind would give a small country credit to finance an airport with capacity 100 times its population? Perceived default risk for Dubai, once one of the Seven Wonders of the financial world now stands at. “Dubai Bonds May Yield Same as Companies One Level Above Junk“
Negative debt/GDP numbers mean that government assets outweigh liabilities. The OECD numbers do not contain contingent liabilities, like public sector pension funds. (Emphasis CrisisMaven)
Buttonwoods posts in The ECONOMIST make graphic reading on the misery:
So, will these states ever repay, “honour” their debt, in fact: can they? In all probability, even if they wanted to, and even that looks increasingly unlikely (like underwater homeowners in the USA there’s a temptation to just “walk away”, see Argentina and others, and, well, blame the banks?), the fact is they can’t afford to. So all this only “worrying” instead of stating the facts is just mincing words and, CrisisMaven believes, equally as unresponsible as taking on debt without intention to repay. This idea has by now arrived in academe:
“Sovereign default: coming to a sovereign near you? The massive build-up of sovereign debt as a result of the financial crisis and especially as a result of the severe contraction that followed the crisis, makes it all but inevitable that the final chapter of the crisis and its aftermath will involve sovereign default, perhaps dressed up as sovereign debt restructuring or even debt deferral. The Dubai World and Nakheel debt standstill and possible default is of systemic significance only because it may well be a harbinger of future sovereign financial distress, in Dubai and elsewhere.
From Dubai to Iceland, Ireland, Greece, Hungary, Italy, Portugal, Spain, Japan, France, the UK and the USA, the sovereign debt burdens have been at current levels during peacetime only on the way down from even higher public debt burdens incurred during wars. Watching the public debt to GDP ratios rise to levels likely to reach or exceed 100 percent of GDP by 2014 is deeply worrying, especially with structural primary (non-interest) deficits as high as they are. The political economy of fiscal burden sharing, inside nations and between nations, will be a major field of enquiry for economists and political scientists during the years to come. I am pessimistic in that regard about countries characterised by deep polarisation and political gridlock. This includes nations as different as Greece and the USA.” (Emphasis CrisisMaven)
And you might also want to check out MoneyAndMarkets – Martin D. Weiss, Ph.D.: “Transcript: Nine Shocking New Predictions for 2010-2012“, 2010-03-01!
… So, to sum it up: those oafs with their cunning plans – they have about as much control over their ships as a madman in a rowing boat with no oars approaching a maelstrom … in fact, they’re already heading for the next one.