The Government Debt Train Nudges Closer To Collision

[Dreadnaught]

The Brits and Germans seem to have been worried about this more actively than the US. But for the Amerikans, they should keep in mind that, whatever you think about this healthcare proposal, we simply fracking can't afford it. Insuring just 1/7th of our population with Medicare is bankrupting us.

It's over. We can't rely on programs that were set up in the 1960s when the US had an out-of-balance share of world GDP. Let's get back to reality. Realism akbar.

March 15, 2010
Credit Agency Warns U.S. and Others of Risk to Top Rating
By DAVID JOLLY

PARIS — The United States, Germany and other major economies have moved “substantially” closer to losing their top-notch credit ratings and can not depend solely on economic growth to save them, a report warned on Monday.

The ratings of the Aaa governments — which also include Britain, France, Spain and the Nordic countries — are currently “stable,” Moody’s Investor Service wrote in the report. But, it added, “their ‘distance-to-downgrade’ has in all cases substantially diminished.”

“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s said. “Preserving debt affordability” — the ratio of interest payments to government revenues — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

Greece, Portugal and other countries that are already in far worse shape have been rocked by strikes and other protests in recent weeks as they try to adopt tough austerity measures.

Without a stronger recovery, governments could encounter serious trouble in phasing out government support for the economy, Arnaud Marès, the main author of the report, said in a statement. That “could yet make their credit more vulnerable,” he said.

Credit ratings are important because higher-rated governments are typically able to borrow at lower costs. Last May, Moody’s cut Japan’s Aaa rating to Aa2, an acknowledgement of the market’s growing unease with the debt burden of the Asian country.

In the United States, the Obama administration estimates that the deficit will rise to 10.6 percent of gross domestic product in the current fiscal year, the highest since 1946, and federal debt will reach 64 percent of G.D.P. Government expenditures are expected to rise to a postwar high of 25.4 percent of G.D.P.

For now, the U.S. debt remains affordable, Moody’s said, as the ratio of interest payments to revenue fell to 8.7 percent in the current year, after peaking at 10.0 percent two years ago. If that trend were to reverse, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”

In Britain, Moody’s said, the risk is that tax receipts fail to keep pace with forecasts, as the government of Prime Minister Gordon Brown has little room left to maneuver. In that situation, the debt — which the government already predicts will stabilize at around 90 percent of G.D.P. — could balloon, undermining the credit rating.

In comparison to both Britain and the United States, the report noted, households in France and Germany entered the crisis with relatively low indebtedness, and hence have a little more room for maneuver. Yet both countries will find themselves under pressure to maintain financial discipline in the event that growth does not rise substantially.

Pierre Cailleteau, managing director of sovereign risk at Moody’s, noted that “discretionary fiscal adjustment” — cutting programs or raising taxes — has become “the principal means of repairing the damage that the global crisis has inflicted on government balance sheets,” and it remains to be seen whether governments are capable of carrying out the painful measures necessary.

“Growth will support some governments’ adjustment plans more than those of others,” Mr. Cailleteau said in the report, “but no government can rely on it.”

There is also a danger that, with governments unwilling or unable to begin withdrawing stimulus, central banks could take the initiative to raise interest rates before the economy is ready, the report found. Such a situation might “quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility.”

Moody’s praised Spain’s recent efforts to address its finances, although “its adjustment process will undoubtedly be drawn out and painful.”

As for the Nordic countries, the agency said the region entered the crisis in relatively good shape, and their credit ratings appeared to be well protected.

http://www.nytimes.com/2010/03/16/bu.../16rating.html

[EyeKhan]

The Brits and Germans seem to have been worried about this more actively than the US. But for the Amerikans, they should keep in mind that, whatever you think about this healthcare proposal, we simply fracking can't afford it. Insuring just 1/7th of our population with Medicare is bankrupting us.

Note that Medicare insures the segment of the population that uses health care most intensively.That's why Medicare appears to be such a costly failure - it's a pool of only the sick people. Looking at an extreme high risk pool only is not a good indicator of what it ought to cost to insure everyone. If you want to attack universal health care for Americans, you ought to take a different angle.

[Ziggy Stardust]

I can't understand why national healthcare is possible and affordable in many countries but impossible and too expensive for the US, who already pay more on healthcare than countries with national healthcare.

Somewhere in there logic shortcircuits.

[Loki]

I can't understand why national healthcare is possible and affordable in many countries but impossible and too expensive for the US, who already pay more on healthcare than countries with national healthcare.

Somewhere in there logic shortcircuits.

Because the US is the only country that pays market price (or something near it) for drugs, doctors, and nurses.

[Aimless]

Because the US is the only country that pays market price (or something near it) for drugs, doctors, and nurses.

No, because: the US pays more for less. You guys are willing to pay through the nose for drugs that have been marked up for dubious reasons, and for drugs that are expensive simply for being new. You also focus far more on specialist care, particularly hospital care, than is economically sound. Your healthcare would be cheaper if you had a strong and skilled primary healthcare sector large enough for your population. Additionally, you lose a lot more to administrative overhead. Finally, you lose a lot of money to defensive medicine. Back on CC I provided a link to at least one thorough analysis (that should be more reliable than both our biased analyses) that concluded that the greater portion of the waste went into overhead and into defensive medicine.

[LittleFuzzy]

I can't understand why national healthcare is possible and affordable in many countries but impossible and too expensive for the US, who already pay more on healthcare than countries with national healthcare.

Somewhere in there logic shortcircuits.

Lower taxes, and it looks like the gap between the costs between healthcare here and healthcare elsewhere is going to continue to rise. That's what drives me nuts the most about the Dems efforts at reform. They're focusing on coverage when the most critical issue is controlling and reducing costs *which will in turn make health care more affordable, so people who have been priced out of it can reenter the system. And with lower costs, it becomes more reasonable for the government to expand its own coverage*

[ar81]

Lower taxes, and it looks like the gap between the costs between healthcare here and healthcare elsewhere is going to continue to rise. That's what drives me nuts the most about the Dems efforts at reform. They're focusing on coverage when the most critical issue is controlling and reducing costs *which will in turn make health care more affordable, so people who have been priced out of it can reenter the system. And with lower costs, it becomes more reasonable for the government to expand its own coverage*

In most of markets, high demand is desirable.
Not in healthcare market, where demand must be lowered, for higher demand means more people sick.
Thinking about higher costs of healthcare to increase supply to satisfy demand is thinking in traditional markets.
The trick to make it cheaper is to reduce overhead in the supply side by creating a 3 level (primary, secondary and tertiary healthcare) national network with a system of reference and counterreference that works more efficiently than the system in US where you have hospitals with no networking, and also to work on reducing the demand side with preventive medicine and universal coverage.

[GGT]

According to research by Jagadeesh Gokhale, an economist at the Cato Institute in Washington, bringing Greece’s pension obligations onto its balance sheet would show that the government’s debt is in reality equal to 875 percent of its gross domestic product, which is the broadest measure of a nation’s economic output. That would be the highest debt level among the 16 nations that use the euro, and far above Greece’s official debt level of 113 percent.

Other countries have obscured their total obligations as well. In France, where the official debt level is 76 percent of economic output, total debt rises to 549 percent once all of its current pension promises are taken into account. And in Germany, the current debt level of 71.9 percent would soar to 418 percent.

Mr. Gokhale, like many other economists, says he believes that this is a more appropriate way to assess a country’s debt level because it underscores the extent to which the cost of providing for rapidly aging populations, if left unchanged, will add to already troubling debt burdens.

“You have to look ahead and see how pension expenditures are rising in comparison to the revenues needed to finance them,” he said. “It’s not just Greece; all major European countries are facing pension shortfalls. It is a very difficult challenge because it involves selling pain to current voters.”
He estimates that to fully finance future pension obligations, the average European country would need to set aside 8 percent of its economic output each year, a practical impossibility given that raising already high taxes so much would impose a crushing economic burden.

Mr. Gokhale has done a similar calculation for the United States and estimates that the truest measure of federal government debt, incorporating Medicare, Medicaid, Social Security and other obligations, is $79 trillion, or about 500 percent of the nation’s output. Currently, its public debt is equal to about 60 percent of its domestic output.

Many of these liabilities will not be coming due for decades. But as most developed countries experience having fewer workers to cover pensions and health care bills for the elderly, their ability to borrow more is rapidly approaching its limits.

http://www.nytimes.com/2010/03/12/bu...ef=todayspaper



Includes some other crazy facts, like being a hairdresser is deemed 'hazardous to health' in Greece.

[Hazir]

I thought it signalled people selling stock and holding cash....

That could happen in a fx-neutral way too. This is really people fleeing towards the bad news because they are uncertain. As if it's better to put your money on the bad news that you know than on the good news that you don't know.

http://www.nytimes.com/2010/03/12/bu...ef=todayspaper


Includes some other crazy facts, like being a hairdresser is deemed 'hazardous to health' in Greece.

Actually it is a bit of a health risk, it is a rather big occupational disability risk.

[GGT]

Actually it is a bit of a health risk, it is a rather big occupational disability risk.

Not in the way we usually consider occupational hazards. Sorry, but "exposure" to dye and chemicals or carpal tunnel from hairdressing shouldn't mean you can retire at age 50, with full pension benefits. No wonder Greece has problems.

[GGT]

Whom do you Trust?

Ratings agencies?
Insurance Industry?
Legislators?
Federal Reserve or Treasury?

go go USA #1!

[ar81]

Costa Rica has a nationalized health system with universal healthcare that has worked for 60 years, and it has a lower cost per capita when compared to US and it delivers higher life expectancy than US.

I can't understand why national healthcare is possible and affordable in many countries but impossible and too expensive for the US, who already pay more on healthcare than countries with national healthcare.

Somewhere in there logic shortcircuits.

The answer is: OVERHEAD. Americans are paying a growing overhead in their premiums.

An insurance CEO may cost $27 million, and he would appear in Forbes, which is about the same price of a jet fighter and it is significanctly higher than the loan used by Costa Rica to reform health sector. You may not think about a government employee making such amount of money for the same job. Unlike other markets, private healthcare creates inefficiencies in the system that raise prices when compared to public systems.

[GGT]

AR, what's Costa Rica's military budget? Or is that left up to the US....

[Loki]

A) US life expectancy is actually a bit higher than Costa Rica's.
B) Libya's life expectancy is roughly the same as both of ours.
C) People really need to learn how statistics are generated and what causes them before making ridiculous causal claims.

[ar81]

Costa Rica has no army. It was abolished in 1948.

Nancy-Ann DeParle, from The White House wrote today:
In US 1 in every six dollars in the U.S. economy is spent on health care today. Skyrocketing health care costs aren't just crippling the U.S. economy -- they're emptying the pocketbooks of American families.

A) US life expectancy is actually a bit higher than Costa Rica's.
B) Libya's life expectancy is roughly the same as both of ours.
C) People really need to learn how statistics are generated and what causes them before making ridiculous causal claims.

A.Probably I had outdates figures. But the whole issue of affordable cost remains.

[wiggin]

The Brits and Germans seem to have been worried about this more actively than the US. But for the Amerikans, they should keep in mind that, whatever you think about this healthcare proposal, we simply fracking can't afford it. Insuring just 1/7th of our population with Medicare is bankrupting us.

It's over. We can't rely on programs that were set up in the 1960s when the US had an out-of-balance share of world GDP. Let's get back to reality. Realism akbar.

Agreed. I was quite disappointed when Obama's proposed budget came out due to its total failure to address deficit growth in the medium or long term. That being said, the US has room to maneuver - our debt-to GDP ratio is still manageable and for now we continue to enjoy very low financing costs.

We all know what the elephant in the room is, though: healthcare and taxes. Oh, we can freeze domestic spending and contain growth in defense spending too. Social Security can definitely use a boost by increasing retirement age. But healthcare hasn't been effectively dealt with by anyone - not Congress' current half-assed plan, Bush's mess with unfunded drug coverage, or Clinton's failed attempts. Receipts simply aren't enough to cover it.

[GGT]

Countries should list entitlement liabilities as percent of GDP.

I read an article that said US would be ~400%, while Greece's would be ~600%. Wish I could remember where I read that...

[Loki]

NEW YORK – The dollar got a lift Monday morning after a leading credit ratings agency warned that the U.S. and the U.K. could see a downgrade of their top AAA credit rating.

That triggered a pull-back from riskier assets such as emerging-market currencies and stocks as investors sought safety in the dollar...

http://news.yahoo.com/s/ap/20100315/ap_on_bi_ge/dollar

Am I the only one who sees the flaw there?

[Hazir]

http://news.yahoo.com/s/ap/20100315/ap_on_bi_ge/dollar

Am I the only one who sees the flaw there?

Yeah, this is one of those things that probably nobody really understands. You'd expect bad US news to have a negative influence on the value of the dollar, but for some strange reason if this bad news leads to uncertainty people flee towards the sinking ship in stead of from it.

[ar81]

http://news.yahoo.com/s/ap/20100315/ap_on_bi_ge/dollar

Am I the only one who sees the flaw there?

It means Americans become more expensive (less competitive workers), pushing more jobs to be sent overseas.
It means more americans suffering stress and illness because of unemployment and suffering "conditions" that would exclude them from health coverage.
Less people with jobs means less consumers and a smaller internal market, that will lead to more lay offs due to lower revenue.
Lower revenue means less taxes for US government and higher deficit which will be compensated with more debt.

It also encourages more trade deficit with China.

[Loki]

Probably doesn't help that most financial analysts are totally incapable of doing anything than reading the predictions of their outdated models. You'd be surprised how little knowledge they have of the world or of economics...

[GGT]

I thought it signalled people selling stock and holding cash....

[ar81]

I thought it signalled people selling stock and holding cash....

That's just speculation.
Dollar raise and no inflation only helps bond traders, not the average jobless American.

Recovery can't come from speculation, but from employment.
A jobless recovery only means another credit bubble.

US system is designed to create inflation.
By buying chinese products US is exporting inflation, but also it also pushes dollar up since transactions increase the demand for dollars, making Americans more expensive, which sends US jobs overseas.

The only other option is to let dollar to fall and suffer inflation, which is like a tax for poor Americans as it will eat buying power.
US has been quite unbalanced, with an overpriced dollar that sent jobs overseas for years.
This overpriced dollar is not the result of "currency manipulation" as some in US try to say.

When people save money and money is not spent, liquidity of economy is reduced, and it helps to control inflation or cause deflation. Chinese save money, and it is convenient for them to import some inflation by selling goods to US.

In the other side, money created by debt, plus the debt of americans, creates a boom where people buy, but then the bust comes when people pay, and that causes deflation and recession. Since banks collect more money than they lend, gradually US economy runs out of money, forcing new debt to create more money, and it creates shorter and smaller booms and longer and deeper bust. As banks stop lending, more dollars need to be created by government to keep money flowing. This is what people call "the economic cycle" that people accept as natural in US.

Spending behavior in US causes dollars to have a higher demand of dollars, not only by consumers but also by government, which makes dollar to go up. As banks start lending again demand for credit goes up even more, risking a hyperinflation because there is to much money flowing in the economy. Instead, chinese save money, government generates surplus, and this money is used to lend to US in dollars, which increases the demand for dollars even more, not because of China, but because of American demand for credit. This article explains the problem: ‘Chimerica’ is Headed for Divorce

A raise of the dollar is bad for American jobs and good for the government that is able to borrow money to fund deficits.
Job recovery will not start unless dollar plunges, and in the first moments of the fall of dollar, Americans will feel lots of inflation and minimal job recovery, because of the borrowing habits that were kept for years.

If US government had surplus, it would have reduced the inflation, but that is not happening.

[Loki]

Alpha, can you please stop pretending to be an expert on things you have absolutely no knowledge about?

[ar81]

Alpha, can you please stop pretending to be an expert on things you have absolutely no knowledge about?

Then enlighten me, master.

[ar81]

Well indeed health "obligation" is a must if they want to have healthy and productive workers.
This is why healthcare exists.

It seems the era of the "national Enrons" where governments hide the numbers.

[GGT]

The elephant in the room asks, "What do we do with all the old people that keep living longer?"

[GGT]

Different type of Death Panel. Man this is depressing!

Maybe this is just a Transition period, that's going to cost boat loads of money until we get over the hump. It's one thing to have longevity secondary to good health (nutrition, vitamins, exercise, treating easy problems before they become immense and systemic, ounce of prevention worth pound of cure).

It's quite another to basically prop up sick lives with surgeries, unproven meds and expensive treatments, spending something like 80% of elder care in the last few months of life, delaying death more than anything. Maybe our kids, or their kids, will have fancy mainstream biologicals and genome therapies that actually Cure and Prevent that won't cost millions of dollars.

Or Quietus suicide packs, available OTC at their local Walgreens.

[GGT]

Nix that biologics breakthrough. Seems congress has agreed to Big Pharma lobbyist demands, and their special sauces get to keep a 12 year patent before any affordable generics hit the scene.

[wiggin]

You think biologics are cheap? In comparison to small molecule drugs, not only are the fixed development costs the same or higher, but the marginal production cost is much higher than a simple chemical.