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GRG55
07-06-09, 08:20 PM
America's Fiscal Train Wreck (http://www.morganstanley.com/views/gef/index.html#anchor098c0c3c-6a29-11de-9228-3fb01e8a07e2)

July 06, 2009

By Richard Berner (http://www.morganstanley.com/views/gef/team/index.html#anchorrichardberner)| New York

America's long-awaited fiscal train wreck is now underway. Depending on policy actions taken now and over the next few years, federal deficits will likely average as much as 6% of GDP through 2019, contributing to a jump in debt held by the public to as high as 82% of GDP by then - a doubling over the next decade. Worse, barring aggressive policy actions, deficits and debt will rise even more sharply thereafter as entitlement spending accelerates relative to GDP. Keeping entitlement promises would require unsustainable borrowing, taxes or both, severely testing the credibility of our policies and hurting our long-term ability to finance investment and sustain growth. And soaring debt will force up real interest rates, reducing capital and productivity and boosting debt service. Not only will those factors steadily lower our standard of living, but they will imperil economic and financial stability...

doom&gloom
07-07-09, 03:21 AM
I wonder why OUR press does not get these stories? Why is it the Telegraph that has to tell us
these things? Where is OUR media with the tingles up their legs?

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5754447/US-lurching-towards-debt-explosion-with-long-term-interest-rates-on-course-to-double.html


US lurching towards 'debt explosion' with long-term interest rates on course to double
The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank

By Philip Aldrick, Banking Editor
Published: 5:44AM BST 06 Jul 2009


http://www.telegraph.co.uk/telegraph/multimedia/archive/01437/geithner1_1437493c.jpg
Tim Geithner, the US Treasury Secretary, has faced searching question about the growing US Budget
deficit. Here he is seen working up a bowel movement in answer to same probing questions.


In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.:eek: (I guess there is no such thing as a 'free-credit lunch' -- funny, it didn't work for the nation as a whole during the last few bubbles, but DC somehow thinks it will work for them).

The impact would be devastating by making it punitively expensive to finance national borrowings and leading to what Tim Congdon, founder of Lombard Street Research, called a “debt explosion”. Mr Laubach’s study has implications for the UK, too, as public debt is soaring. A US crisis would have implications for the rest of the world, in any case. (I bet this is not one of the sweet things Larry Summers mentions in Obama's ears every night as he tries to sooth him over the economy)

Using historical examples for his paper, New Evidence on the Interest Rate Effects of Budget Deficits and Debt, Mr Laubach came to the conclusion that “a percentage point increase in the projected deficit-to-GDP ratio raises the 10-year bond rate expected to prevail five years into the future by 20 to 40 basis points, a typical estimate is about 25 basis points”.:eek: (back to what I keep saying about getting spending under control before it is too late)

The US deficit has blown out from 3pc to 13.5pc in the past year but long-term rates are largely unchanged. Assuming Mr Laubach’s “typical estimate”, long-term rates have to climb 2.5 percentage points. (and were it not for the "safe haven" status of the $USD, they would have long passed that point. When the BRIC's succeed in changing the dollar standard -- look out!)

He added: “Similarly, a percentage point increase in the projected debt-to-GDP ratio raises future interest rates by about 4 to 5 basis points.” Economists are predicting a wide range of ratios but Mr Congdon said it was “not unreasonable” to assume debt doubling to 140pc. At that level, Mr Laubach’s calculations would see long-term rates rise by 3.5 percentage points. (takeaway -- do not buy long bonds!)

The study is damning because Mr Laubach was the Fed’s economist at the time, going on to become its senior economist between 2005 and 2008, when he stepped down. As a result, the doubling in rates is the US central bank’s own prediction. (has anyone bothered to tell Timmy yet?)

Mr Congdon said the study illustrated the “horrifying” consequences for leading western economies of bailing out their banks and attempting to stimulate markets by cutting taxes and boosting public spending. He said the markets had failed to digest fully the scale of fiscal largesse and said “current gilt yields [public debt] are extraordinary low given the size of deficits”.

Should the cost of raising or refinancing public debt in the markets double, “the debt could just explode”, he said, adding that it would come to a head in “five to 10 years”.

LargoWinch
07-09-09, 06:06 PM
Great find, thanks for posting GRG55.

The full article can be found below:

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rabot10
07-09-09, 10:09 PM
Great find, thanks for posting GRG55.

The full article can be found below:


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Largo thanks for all of your posts - very much apr