Debt and Deficit: When Graphics Speak Louder Than Words

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  • Tylerdurden
    Banned
    • Jul 2006
    • 19903

    Debt and Deficit: When Graphics Speak Louder Than Words

    Concern about the European sovereign debt crisis has moved from Greece, to Portugal when Moody's downgraded the country to junk status last week. Now Italy has become the new victim as worries of a debt crisis contagion, as Italy, euro zone's third largest economy, is the next weak link in the region (See Chart).

    The Wall Street Journal reported that default insurance costs for Italy, Portugal, Ireland and Greece have all hit record highs Monday, July 11. The crisis only got worse Tue. July 12, when Ireland also got axed to junk by Moody's.
    Source: New York Times
    According to NYT, the interest on Italy's 10-year bond spiked to a record 5.67%. While that is still far below what Greece is paying nowadays, analysts say Italy will have serious problems if its borrowing costs exceed 6%.

    If markets were worried about banks' exposure to Greece, check out these numbers cited by NYT:
    "European banks have total claims and potential exposures of 998.7 billion euros to Italy, more than six times the 162.4 billion euro exposure they have to Greece, according to Barclays Capital. European banks have 774 billion euros of exposure to Spain and 534 billion euros of exposure to Ireland.

    In the United States, banks are also more exposed to Italy than to any other euro zone country, to the tune of 269 billion euros, according to Barclays. American banks' next biggest exposure is to Spain, with total claims estimated at 179 billion euros."
    In addition to a debt load of 120% of its GDP--the second highest in Europe--Italy's predicament could also be partly attributed to the political power struggle between Prime Minister Silvio Berlusconi and his finance minister, Giulio Tremonti, as the political dispute is threatening the country's austerity and debt management efforts.

    If the Italian sings a good political opera, the United States gets an Emmy for its political soap.

    Deadline is fastly approaching for the United States. If the Congress fails to reach a deal in 10 days in order to meet the Aug. 2 deadline to lift the nation's debt ceiling, the U.S. could face probably its biggest calamity in history--a sovereign default.

    Congressional Republicans, who insist that any deal could include no tax hikes, have rejected President Obama's $4 trillion deal. At the same time, Democrats also oppose Obama's plans to cut government aid to seniors and low-income Americans.

    This chart below from Bloomberg illustrates the great divide between the nation's spending and income.

    Source: Bloomberg.com
    The dotted line shows federal spending as a percentage of GDP since World War II. The solid line shows income taxes as a percentage of GDP are at 14.9%, the lowest since 1950. The average in the last 60 years has been closer to 18%, based on data compiled by Bloomberg.

    What does this chart tell you? It makes logical sense that in order to narrow the spending and income gap, both lines would need to move towards the middle. That means raising taxes AND cut spending; otherwise, it will be just twice as difficult to put the government budget on the right track.

    One analyst remarked that “Italy is too big to fail,” while the other noted “If Italy goes, it's no longer a domino. It's a brick!”
    If the descriptions of "Too Big To Fail" and "Brick" applies to Italy, think of the U.S. as "Too Big To Bail out" (since "Too Big To Fail" did get bailed out) and "an asteroid the size of Texas" (as in the 1998 movie Armageddon), which would be probably end up to be an understatement for the world.

    Further Reading:
    Gold and Dollar Pop on Euro Debt Crisis
    Cracks Beneath: China, Greece, US and Derivatives

    ZeroHedge - On a long enough timeline, the survival rate for everyone drops to zero
  • genglandoh
    Senior Member
    • Dec 2010
    • 10538

    #2
    Re: Debt and Deficit: When Graphics Speak Louder Than Words

    I just checked the US is at 98% of GDP.

    Not looking good.
    "The only rules that really matter are these: what a man can do and what a man can’t do." Captain Jack Sparrow

    Comment

    • Tylerdurden
      Banned
      • Jul 2006
      • 19903

      #3
      Re: Debt and Deficit: When Graphics Speak Louder Than Words

      Thin ice while walking an elephant comes to mind.

      Comment

      • genglandoh
        Senior Member
        • Dec 2010
        • 10538

        #4
        Re: Debt and Deficit: When Graphics Speak Louder Than Words

        The real scary issue is if interest rates go up the money we will need to spend for this dept will force us to cut other spending.
        "The only rules that really matter are these: what a man can do and what a man can’t do." Captain Jack Sparrow

        Comment

        • Tylerdurden
          Banned
          • Jul 2006
          • 19903

          #5
          Re: Debt and Deficit: When Graphics Speak Louder Than Words

          I honestly don't think it will get that far considering the EU. If it does get this far we will have no idea how far it is to the bottom.

          Comment

          • B_B
            Banned
            • Sep 2001
            • 6506

            #6
            Re: Debt and Deficit: When Graphics Speak Louder Than Words

            Originally posted by genglandoh
            I just checked the US is at 98% of GDP.
            Not looking good.
            Half of that is owed to itself - Social Security etc.

            The US Federal debt owed to non-US Federal Gov't entities, as a percentage of GDP, is 58%. Much more manageable.

            Comment

            • genglandoh
              Senior Member
              • Dec 2010
              • 10538

              #7
              Re: Debt and Deficit: When Graphics Speak Louder Than Words

              Originally posted by Braam Berrub
              Half of that is owed to itself - Social Security etc.

              The US Federal debt owed to non-US Federal Gov't entities, as a percentage of GDP, is 58%. Much more manageable.
              Please explain because I really do not understand.

              If half of the debt is SS are you saying the Government does not have to pay the money back?

              If they do not pay the money back does the SS plan stop paying SS checks to the retired?

              Thanks is advance
              "The only rules that really matter are these: what a man can do and what a man can’t do." Captain Jack Sparrow

              Comment

              • Tylerdurden
                Banned
                • Jul 2006
                • 19903

                #8
                Re: Debt and Deficit: When Graphics Speak Louder Than Words

                Originally posted by Braam Berrub
                Half of that is owed to itself - Social Security etc.

                The US Federal debt owed to non-US Federal Gov't entities, as a percentage of GDP, is 58%. Much more manageable.
                Sorry cannot bother with your argument because you have no direct interest in it. But your wrong.

                Comment

                • genglandoh
                  Senior Member
                  • Dec 2010
                  • 10538

                  #9
                  Re: Debt and Deficit: When Graphics Speak Louder Than Words

                  GDP=14,790 Billion
                  National Debt = 14,290 Billion
                  2011 Budget deficit = 1,600 Billion about 10% of GDP

                  GDP is growing about 4% per year.
                  Nation Debt growing 10% of GDP

                  The US is at 98% debt to GDP.
                  We will over 100% of GDP very soon.

                  If the statement about SS is true then the number will change.
                  But I really do not understand the SS issue so if someone can explain please do.
                  "The only rules that really matter are these: what a man can do and what a man can’t do." Captain Jack Sparrow

                  Comment

                  • B_B
                    Banned
                    • Sep 2001
                    • 6506

                    #10
                    Re: Debt and Deficit: When Graphics Speak Louder Than Words

                    Originally posted by genglandoh
                    If half of the debt is SS are you saying the Government does not have to pay the money back?
                    If they do not pay the money back does the SS plan stop paying SS checks to the retired?
                    This week, the federal government published two important reports on long-term budgetary trends. They both show that we are on an unsustainable path that will almost certainly result in massively higher taxes.

                    The first report is from the trustees of the Social Security system. News reports emphasized that the date when its trust fund will be exhausted is now four years earlier than estimated last year. But in truth, this is an utterly meaningless fact because the trust fund itself is economically meaningless.

                    The 2010 budget, which was finally released this week, confirms this fact. As it explains in Chapter 21, government trust funds bear no meaningful comparison to those in the private sector. Whereas the beneficiary of a private trust fund legally owns the income from it, the same is not true of a government trust fund, which is really nothing but an accounting device.

                    Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled "Social Security trust fund."

                    The problem is that by law 100% of these "assets" are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It's as if you wrote an IOU to yourself; no matter how large the IOU is it doesn't increase your net worth.

                    This fact is documented in the budget, which says on page 345: "The existence of large trust fund balances … does not, by itself, increase the government's ability to pay benefits. Put differently, these trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the government as a whole."

                    Consequently, whether there is $2.4 trillion in the Social Security trust fund or $240 trillion has no bearing on the federal government's ability to pay benefits that have been promised. In a very technical sense, it would lose the ability to pay benefits in excess of current tax revenues once the trust fund is exhausted. But long before that date Congress would simply change the law to explicitly allow general revenues to be used to pay Social Security benefits, something it could easily do in a day.

                    The trust fund is better thought of as budget authority giving the federal government legal permission to use general revenues to pay Social Security benefits when current Social Security taxes are insufficient to pay current benefits--something that will happen in 2016. Effectively, general revenues will finance Social Security when the trust fund redeems its Treasury bonds for cash to pay benefits.
                    From here
                    as per usual - bolding and underlining by me
                    Hope this helps.

                    Comment

                    • B_B
                      Banned
                      • Sep 2001
                      • 6506

                      #11
                      Re: Debt and Deficit: When Graphics Speak Louder Than Words

                      Originally posted by Tylerdurden
                      Sorry cannot bother with your argument because you have no direct interest in it. But your wrong.
                      Well, I think I'm right. And you're in no position to know whether or not I have a direct interest in the situation; I do.

                      Comment

                      • Tylerdurden
                        Banned
                        • Jul 2006
                        • 19903

                        #12
                        Re: Debt and Deficit: When Graphics Speak Louder Than Words

                        Originally posted by Braam Berrub
                        Well, I think I'm right. And you're in no position to know whether or not I have a direct interest in the situation; I do.
                        Well my apologies then. Your right if you only follow mainstream reporting which is most often a fraud of the actual.

                        Comment

                        • genglandoh
                          Senior Member
                          • Dec 2010
                          • 10538

                          #13
                          Re: Debt and Deficit: When Graphics Speak Louder Than Words

                          Originally posted by Braam Berrub
                          From here
                          as per usual - bolding and underlining by me
                          Hope this helps.

                          Thanks It helps but I need to think about it a little.

                          I do hope you are right about it.
                          "The only rules that really matter are these: what a man can do and what a man can’t do." Captain Jack Sparrow

                          Comment

                          • B_B
                            Banned
                            • Sep 2001
                            • 6506

                            #14
                            Re: Debt and Deficit: When Graphics Speak Louder Than Words

                            Originally posted by Tylerdurden
                            Your right if you only follow mainstream reporting ....
                            What does 'mainstream reporting' have to do with the issue of whether or not the SS Trust Fund (and other 'debt' the US Fed Gov't owes itself) is an accounting convenience/trick or not?

                            Comment

                            • Dutch
                              Banned
                              • Nov 2000
                              • 2818

                              #15
                              Re: Debt and Deficit: When Graphics Speak Louder Than Words

                              not to worry here comes QE3 just in the nick of time!


                              that ought to buy us a few more months of musical chairs!

                              Hopes of additional stimulus were raised a day earlier as the Fed's minutes for its June policy meeting showed that some policymakers advocated for further supportive measures for the economy. The central bank completed its $600 billion Treasury bond buying program in June, known as a second-round of monetary stimulus, or QE2.

                              While the Fed continues to buy Treasurys via its maturing mortgage-backed securities holdings, some investors argued that the Fed may need to do more, in the form of QE3, if the soft data in recent weeks persist in the second half.

                              Comment

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