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An analyst at Deutsche Bank (DB) created some buzz the other day when he said that the PIIGS’ (Portugal, Ireland, Italy, Greece, Spain) debt crisis could be a “dress rehearsal” for a U.S. one.

It makes for a catchy headline, but the funding crisis in America will play out differently than the PIIGS bloc's does. The key difference is our ability to print money and devalue the dollar. QE is off-limits for EU members, at least. Bernanke would probably call that an advantage, but I’m not so sure.

Either way, it is nice to see some light shined on America’s debt problem. It’s not pretty and the sooner we deal with it the better. From BusinessWeek:

The cost of insuring against U.S. and U.K. debt defaults may rise in the same way as it has for so- called European peripheral nations including Greece and Portugal, Deutsche Bank AG said.

‘The problems currently faced by peripheral Europe could be a dress rehearsal for what the U.S. and U.K. may face further down the road,’ Jim Reid, a strategist at Deutsche Bank in London, wrote in a research note today.

The cost of insuring against U.S. and U.K. debt defaults may rise in the same way as it has for so- called European peripheral nations including Greece and Portugal, Deutsche Bank AG said.

‘The problems currently faced by peripheral Europe could be a dress rehearsal for what the U.S. and U.K. may face further down the road,’ Jim Reid, a strategist at Deutsche Bank in London, wrote in a research note today.

I heard the “dress rehearsal” line on Bloomberg, during a Niall Ferguson segment. Scroll down for the clip, it’s among the better mainstream coverage of the global-debt-crisis coverage.

Worse than Greece?

The fundamental outlook for PIIGS is bad. Greece has gotten the lion’s share of attention lately lately. But you could argue the same or worse for the United States or U.K.

Zero Hedge recently escalated the acronym-hoopla by adding the U.K., Turkey, and Dubai to create STUPID. Regular readers objected to the absence of the U.S., expanding it to STUUPID.

America’s situation isn’t pretty, and may be worse than PIIGS’ or STUPID’s long-term outlook. In the Bloomberg clip I mentioned earlier, Niall Ferguson points out that in 2009 America’s deficit-to-GDP ratio was 10.2%, compared to Greece’s 8.7%. Spain and Ireland were both slightly worse, with deficit-GDP ratios of around 11%. I included the Ferguson clip at the bottom of this post along with some interesting charts comparing the health of various economies.

Cutting Back vs. Ramping Up

Greece is currently implementing “draconian” budget cuts, while America continues to spend like mad, focusing exclusively on the immediate future. It’ll be interesting to look back in 5-10 years and see how the contrasting strategies played out.

It’s the Total Debt

America’s official public debt-GDP number may not be at nauseating levels yet (around 85% of GDP), as pundits like Krugman and DeLong are fond of reminding us. But even the official US numbers are ugly, particularly the recent spike, as shown by this chart:

While the U.S. isn’t the worst offender on the chart, there are a number of problems with these official numbers. First, these comparisons don’t factor in some very real liabilities, including trillions of potentially-worthless Fannie (FNM) and Freddie (FRE) assets. Jonathan Weil of Bloomberg explains:

Excluding Fannie and Freddie, the national debt held by the public is about $7.9 trillion. With them, it exceeds last year’s $13.2 trillion gross domestic product. Even the geniuses at Moody’s Investors Service are warning that the country’s AAA rating might not last. No country can owe more than its yearly productive output for long without giving up its accustomed lifestyle and influence.

Those numbers also only include federal debt. America’s local governments, companies, and citizens are all leveraged to the hilt. This chart is at least a year old, but it’s telling:

Liabilities Ignored, Baby Boomer Crunch Looms

Cooked government books also ignore entitlement program shortfalls and unfunded future liabilities. Take a look at Social Security, which, for the first time in 25 years, is collecting less in taxes than it disburses. That wasn’t supposed to happen until 2016. Bruce Krasting has a good writeup here.

The outlook for social security, and all other entitlement programs, will only get worse as Baby Boomers retire. When Boomers, an outsized age-demographic, were in their earnings prime, social security and other programs had large surpluses. But instead of putting that money aside to pay for the inevitable trend reversal, we padded our deficits with it. It’s gone.

Depending on which numbers you look at, and what timeline you use, America has unfunded liabilities of anywhere from $30 trillion to $99 trillion. The higher number comes, surprisingly, from the head of the Dallas Federal Reserve, Richard Fischer (from a 2008 speech):

For the existing unfunded liabilities to be covered in the end, someone must pay $99.2 trillion more or receive $99.2 trillion less than they have been currently promised. This is a cold, hard fact

It’s inevitable, and borderline cliche, but America’s years of gluttony will inevitably lead to a day of reckoning. Somebody’s bound to get screwed, and most people will have to adjust to a lower-quality of life for a while.

Holders of U.S. debt will likely take hits if/when QE 2.0 begins. Baby boomers themselves are getting crushed by low interest rates. How is a retiree supposed to live off 1% CDs? Bernanke will keep rates down as long as he can, because it’s incredibly profitable for banks. But it’s going to be brutal for those who rely on fixed income.

The system can eventually fix itself, but only if we let it. Eternal monetary easing and government support is a recipe for a subpar economy, indefinitely. Analysts are also seeing an increased risk of a prolonged period of stagflation.

I’ll end with this quote from Jesse, who has a way with words:

The banks must be restrained, the financial system reformed, and balance restored to the economy before there can be any sustained recovery

Here’s that Niall Ferguson segment from Bloomberg. Skip to 4:35 for the Deutsche Bank “dress rehearsal” quote and some nice graphs.

Source: Race to Ruin: U.S. vs. PIIGS