The Looming Black Cloud of Government Debt

The market’s move yesterday is another reminder that for all of the “green shoots” one might see in the economy, there’s the tricky issue of the looming black cloud of government debt that is about to replace the soon-to-be-behind-us black cloud of financial mayhem in the banking system. This note from RBC’s U.K.-based Fixed Income and Currency Strategy Research Group hits the high (and low) notes:

• Budget deficits are rising rapidly in the major economies.
• The damaging effects on public finances of the deepest downturn in global activity for seventy five years are being reinforced by a combination of the loss of exceptional revenue flow related to asset price booms, discretionary fiscal policy easing and large scale financial sector bail outs.
• As a consequence, net government debt/GDP ratios have begun to soar. Even on optimistic assumptions, in a number of industrial economies, debt burdens stand to be rise by anything from a third to almost 100% over the next five years. On less optimistic assumptions, the prospective debt dynamics are truly explosive.
• The greatest concerns relate to the U.S., the U.K. and Japan, while Canada, Australia and New Zealand appear to be in rather better shape. The Eurozone stands somewhere in between.
• The prospective surge in public sector debt will swell interest payments, limit the further use of fiscal policy for the purposes of macroeconomic stabilisation, exert upward pressure on Treasury bond yields, boost the risk premia on currencies and increase the incentive for governments to monetise debt and boost inflation.
• The markets need reassurance in the form of credible strategies to bring fiscal positions to heel. But such is the extent of the problem that any attempt rapidly to return debt ratios to pre-crisis levels through discretionary fiscal policy tightening would require a range of painful, if not suicidal, political decisions, particularly given the growing claims on resources of ageing population structures. It would also involve considerable output costs, slowing the pace of recovery, if not killing it altogether.
• The consolidation of OECD public finances will therefore probably prove a long-term project.
• In the meantime, the risk is of more high profile sovereign downgrades, with the U.S. and U.K. very much in the firing line, the further erosion of the U.S. dollar’s reserve currency status, and significant upward pressure on the equilibrium level of government bond yields.

Comments

[SW Richmond:]

Western governments and central banks are in a trap they've built for themselves. Governments believed they could promise endlessly, and central banks could inflate endlessly; Cheney famously said "Deficits don't matter."

The capital pool is exhausted. According to The Economist, $25 Trillion of private rollover is needed in the next few years, and they note: "without an implicit state back-stop this would be impossible."

If private capital means anything, deficits DO matter, and governments are under tremendous pressure to raise revenues during a downturn in order to show fiscal restraint. We must see Obamacare for what it is: Obamacare is a tax increase masquerading as universal health care. We will all pay more and get less, the difference accruing to the government's balance sheet. Isn't that obvious?

The combination of tax increases and governments hoovering up all the capital will prove fatal unless a massive inflation is undertaken. Massive inflation translates into massive currency debasement and higher interest rates for government debt, the "risk free rate of return" now laughably revealed as, well, laughable, to everyone except Moody's, who recently affirmed the U.S.'s AAA rating. Maybe we should be laughing at Moody's.

The administration needs desperately to keep the military engaged overseas, as there are no jobs here for returning vets with all those government-furnished easily-radicalized terrorist skills. The power vacuum we've created in Iraq would be filled quickly by our enemies upon our departure. Empire is expensive, and we're out of money.

Thanks for the article.

Jun 24 07:48 AM

[User 357705:]

"there’s the tricky issue of the looming black cloud of government debt that is about to replace the soon-to-be-behind-us black cloud of financial mayhem in the banking system"

Cute! State something with an element of truth in an attempt to divert the readers attention from the bankster's financial mayhem and further try to suggest that its all behind us when its only just begun.

Jun 24 07:50 AM

[User 357705:]

Whether this statement was intentional and/or Freudian it is remarkable in both its candor and accuracy!


On Jun 24 07:48 AM SW Richmond wrote:

>
>
> The administration needs desperately to keep the military engaged
> overseas, as there are no jobs here for returning vets with all those
> government-furnished easily-radicalized terrorist skills.
>

Jun 24 07:54 AM

[Ferdinand E...:]

So once again a commentator quotes what I call the "a compendium of London wine-bar gossip" - or The Economist - and this time the figure 25 trillion dollars is given as the required 'private rollover'.to make President Obama's dreams come true. Hmm. I picked up an Economist the other day, and according to them AECL of Canada is going into the tank, although that firm recently completed a 750 MW Candu (nuclear) plant in China, and brought it in earlier than specified on the contract.

Well, there is nothing I would like better than to inform contributors to this forum that sometimes The Economist has a problem where trivialities like the 'truth' and economic analysis are concerned, but so does the author of this article.

Jun 24 08:52 AM

[fireball:]

the oligarchs that own our politicians own the oversized financials. the fed is the ace in the hole. what a mess for the citizens this unconstitutional money/banking scam has wrought.
even the few who were careful and responsible will be dragged down as inflation,deflation are used to expand and contract the fiat money supply to squeeze the last drops of wealth and financial independence from the middle class.
obama is not stupid. he has done the opposite of what he said. remember "the failed policies of the last 8 years uttered about 1000 times?" some of those that supported him are waking up to this. they are the intelligent objective few. most of the bleating sheep still think he is something besides one more politician.
jackson was a public servant that knew exactly the evil he stood against.

Jun 24 09:06 AM

[ksmithdc:]

Interesting read, thanks.

Jun 24 10:06 AM

[Neil459:]

This crisis is not a bank fraud, not a money/banking scam, or not CEOs running away with the piggy bank. It is quite simply government fraud. Optimistically, no one was watching while the system went haywire. Pessimistically, the current crop of government crooks were just waiting, knowing, and salivating at the power they could consolidate.

To know that this is true look at the actions, not the speeches.

If we all turned off our TV and listened to the radio (and I do not mean Rush) we would hear the lies and double dealing.

Jun 24 11:34 AM

[CLH:]

I look at this huge debt in a positive light. There is little chance that any more socialism can be pushed down our throats. Socialism is expensive because millions must be clothed, fed, housed and given medical care even though they are not required to be productive. See what happened to the USSR as it slid into bankrupcy. USSR first and then CA, America is next.

Jun 24 12:53 PM

[awake09:]

CLH: You underestimate our current liberal Jim Jones-esque president. He tells his cult members that new social programs will fix the deficits and economic problems! Socialized health care is what the businesses in American need! More stimulus! More good times at the expense of those 'rich' people who started this mess!

And they will believe it as they have no root in truth, only celebrity worship. Oh-Bah-Mah is a celebrity who cannot be honestly evaluated or scrutinized, any more than Tom Hanks or Oprah can be... it would break the spell.

Jun 24 01:14 PM

[crawlars:]

Exactly correct. Understanding this causes one to see everything differently...a lot of mysteries are unveiled. No longer do I ask why government does what it does.

So we are left with: Putter along in blissful ignorance (enjoy life while you can), revolt or try to figure out how to make money on it all.


On Jun 24 09:06 AM fireball wrote:

> the oligarchs that own our politicians own the oversized financials.
> the fed is the ace in the hole. what a mess for the citizens this
> unconstitutional money/banking scam has wrought.
> even the few who were careful and responsible will be dragged down
> as inflation,deflation are used to expand and contract the fiat money
> supply to squeeze the last drops of wealth and financial independence
> from the middle class.
> obama is not stupid. he has done the opposite of what he said. remember
> "the failed policies of the last 8 years uttered about 1000 times?"
> some of those that supported him are waking up to this. they are
> the intelligent objective few. most of the bleating sheep still think
> he is something besides one more politician.
> jackson was a public servant that knew exactly the evil he stood
> against.

Jun 24 01:34 PM

[a. palmer jr.:]

There might be jobs here for returning servicemen and women but we would have to run off all the illegal aliens that are taking those jobs now. If we had a government with any sense at all, those servicemen wouldn't be over there, they would be on our southern border, guarding the Country, which is their duty anyway.

Jun 24 02:57 PM

[Danny Newton:]

We will pay back the debt with inflated money and pretend that only the rich are being conscripted into the war on debt whle the poor are being exempted by a progressive income tax.

Jun 24 03:10 PM

[user396040:]

This argument was also made in the 1930's - at least, back then people waited until 1937 and there was actual evidence of an economic recovery to make the argument - it was taken very seriously, in 1937, the government raised taxes, balanced the budget, tightened monetary policy and the economy promptly tanked until we were finally rescued by the deficit spending of World War 2.

Jun 24 04:02 PM

[The Geoffster:]

Don't blame the politicians, blame yourselves. The fault lies not in our stars but in ourselves, said the Bard. We are a corrupt and venal species. We'll get over this latest mess and repeat it again, every 80 years or so. The span of one lifetime. In the meantime, follow SA and make some money.

Jun 24 08:26 PM

[Northstar10000:]

forget all the stupid bankster talk. where did they get the money and mandates, political pull, sweet regs., and bailout money. Boy have the feds ever got you guys fooled. Who invited the Goldman boys in to run the show? If you think the government is so great watch what they have in store for you next. the government has successfully brain washed the fools into thinking they are the good guys looking out for you.

Jun 24 09:03 PM

[seekingnorm...:]

Stimulus
It is the month of August, on the shores of the Black Sea. It is raining, and the little town appears deserted. It is a tough time, people are in debt and everybody lives on credit.
Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 Euro note on the reception counter and heads upstairs to select a room for the night.
The hotel proprietor takes the 100 Euro note and runs off to pay his debt to the butcher.
The butcher takes the 100 Euro note and speeds off to the pig famer to repay his debt.
The pig farmer takes the 100 Euro note and settles his feed and fuel supplier credit.
The feed and fuel supplier takes the 100 Euro note and runs to pay his debt to the town's prostitute who, in these hard times, has been providing her "services" on credit.
The hooker runs to the hotel and pays off her room charges.
The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.
At that moment, the rich tourist comes down from inspecting the rooms, takes his 100 Euro note and leaves town as he didn't like any of the rooms.
No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism…
And that, ladies and gentlemen, is how the United States Government is doing business today and the main reason the rest of the world is messed up!

Jun 24 11:15 PM

[realold:]

I worked for a county in California. My pension was funded 1/2 by withholding from my pay and 1/2 from the county. When I retired, the county fixed the pension in large part by using my "pension funds" to purchase an annuity. I get no cost of living increase and still get the same monthly check as I did when I retired. I pay $500 a month for Medicare advantage health insurance to the county, after taxes. I get about 27% of my previous salary.

Finally, I owned a software company for twenty years before selling out to fund my kids college educations. I went to work for the major employer in my area - the county. My wages were 1/3 of what they had been, though working my way up to IT divison manager I most often worked 12 hour days and was on call seven days a week, as were those who worked for me. No performance raises or bonuses in our local government. Some renumeration - a modest pension and the ability to get health insurance - my reasons for going to work there.

The point: Your brush is broad and handpicked. California state pensions are bloated, but not ALL cities and counties are anything like what you describe. Your brush is broad, but reality is much more complex.

Jun 25 12:16 AM

[Steve Soden:]

The pale faces of Hank Paulson and Nancy Pelosi in 2007 will be repeated when Government runs out of answers.
The washout will come and all of us will suffer, even the rich.
The Simple life is just around the corner.
If your smart you'll get started now.

Jun 25 04:36 AM

[perceptions...:]

Great line!!!


On Jun 24 07:48 AM SW Richmond wrote:

Empire is expensive, and we're out of money.
>
>
> Thanks for the article.

Jun 25 08:12 AM

[Mad Hedge F...:]

It's time to pay the piper. I know what keeps Obama awake at night. Let’s say we spend our $2 trillion and get a couple of quarters of weak 2% type growth. Then once the effects of the stimulus wear off, we slip back into recession, setting up a classic “W” type recession. Unemployment never does stop climbing. This happened to Roosevelt in the thirties. So congress passes another $2 trillion reflationary budget. Everybody get’s wonderful new mass transit and alternative energy infrastructure. But with $4 trillion in spending packed into two years inflation really takes off. The bond market collapses, the dollar tanks big time, gold goes ballistic to $3,000, and silver to $50. Ben Bernanke’s replacement has no choice but to engineer an interest rate spike, taking the Fed funds rate up to a Volkeresque 20%. Housing, having never recovered, drops by half again. This all happens in the 2012 election year. Obama is burned in effigy, a Mormon is elected president, and the Republicans, reinvigorated by new leadership, retake both houses of congress. We invade Iran. Crude hits $200. This is not exactly a low probability scenario. Remember Jimmy Carter? This is why junk bond yields are still stubbornly high at 14.5%, and credit default swaps are at lofty levels. The risk of Armageddon is still out there. Just thought you’d like to know. Pass the Ambien.

Jun 25 09:00 AM