Quo vadis USA ?

Not Just a Another Greek Tragedy


The Greek bond market crisis can be summed up quite simply - too much debt, too
much spending, not enough revenues. Riots, 15% interest rates and slashed budgets
are the results, so far. And the Greeks are not alone. Spain and Portugal just had
their debt downgraded by S&P and Italy and the UK are teetering. But we live in
America and problems like that don’t happen here... Right?

The US is more like Greece than you know...

The table at the bottom of this paraghraph is from a recent report entitled “The Future of Public Debt.”  published by the Bank for International Settlements (BIS). It is an analysis of the
relationship between a country’s debt, their deficit and their GDP. The higher the
debt to GDP ratios, the worse the fiscal situation. This is because the cost of
servicing the debt can cause a drain on the economy.

Greece’s Fiscal Balance (Budget Deficit) is -9.80% of
GDP, while America’s is -10.70%. Of the countries listed,
only Ireland and the UK have worse Fiscal Balances than
the US for 2010. Most countries listed are expected to
reduce their deficits slightly in 2011.

Currently, Portugal and Spain are being targeted by the
bond vigilantes, even though they are in obviously better
fiscal condition than the US. One has to wonder when it
will be America’s turn to have to deal with an imploding
bond market. The BIS puts it more succinctly - “This leads
us to conclude that the question is when markets will start
putting pressure on governments, not if.”

By “putting pressure on governments”, what they mean is a
decline or collapse of the bond market. Interest rates
skyrocket, ballooning the cost of carrying the debt. This
forces a government, as it is with Greece, to face their fiscal problems and put their
house in order.

The reaction so far in Greece has not been a pleasant one. In fact, the people have
rioted. It seems they would prefer not to give up any of their government services,
nor would they like to pay more in taxes to pay for said services.

The Greek government’s and the EU’s response comes directly out of Greenspan’s
playbook - They are borrowing more money! They can’t afford the debt they
currently have, so adding more debt must be the solution!

Fiscal Situation and Prospects

as a percentage of GDP

               Fiscal Balance                        Gen Govt Debt

                 2007 2010 2011            2007 2010 2011

Germany 0.2     -5.3  -4.6               65     82     85

Greece   -4.0    -9.8 -10.0            104     123    130

Ireland    0.2   -12.2 -11.6             28       81      93

Italy       -1.5     -5.4   -5.1            112    127    130

Portugal -2.7    -7.6   -7.8              71       91     97

Spain      1.9     -8.5  -7.7              42       68      74

U K       -2.7   -13.3 -12.5             47        83     94

USA      -2.8   -10.7 -9.4               62        92     100

Asia        0.1 -3.5   -3.6                37        40       41

Asia is China, Hong Kong, India, Indonesia, Korea, Malaysia, the Philipines, Singapore and Thailand

Sources: IMF; World Economic Outlook, OECD, BIS; Format: CIS

1


Dollar Printing Press


The Federal Reserve has made it clear that their number one
solution to whatever ails an economy is more money, more
money and more money, in that order!

The Fed pumped trillions of dollars into the system (bailing out
banks, brokerages and mortgage companies) to try to keep the
economy from collapsing in 2008 and 2009. This influx of
liquidity filled holes in bank balance sheets and, thanks to some
questionable changes in accounting rules, banks get to keep poor
and non-performing loans on their books at fictitious valuations.

The Fed also gave away another few hundred billion to the
insurance companies. The FDIC has a blank check to bail out
anybody they see fit. The Fed gave the mortgage industry a
Christmas present when on Christmas Eve 2009, they gave
Fannie Mae and unlimited line of credit. The autos have
received hundreds of billions and who knows who is next

Since the beginning of the Financial Crisis, the Fed has
pumped almost $1.3 trillion into the banking system to keep
it from failing. About $500 billion went in after the official
end of the recession.
Source: Federal Reserve; Format: CIS

 
Get ready for inflation


Since the early 1980’s, inflation has been tame, so interest rates have been declining.
But now both internal and external forces are converging to create inflation like we
have never seen before.

Inflation can be caused by too many dollars chasing too few goods or raw materials.
America has created too many dollars thanks to the Fed’s actions, and global
consumption is driving up the cost of various hard assets and resources.

The BLS recently reported that that food and energy inflation was up 18.70% year
over year as of March 2010. Yet, the core inflation rate was only 1.30% for the same
period. Core inflation does not include food and energy. I guess the

BLS doesn’t consider them essentials. So those of you that were
concerned about the 18.70% increase in food and energy since

March 2009, you really have no worry, as long as you don’t use
either food or energy.

The global consumption boom, while not straight up, will likely
continue for several decades due to urbanization trends in many
emerging nations. Regardless of the economic situation in America,
the global demand for resources will likely continue unabated. This
should drive prices up for Americans, even in a slow growth or
recessionary domestic economy. America is not the driver of
commodity prices, it is foreign consumption.



Extracts from an article by
John J. Riley

Chief Strategist
johnr@cornerstoneri.com

Cornerstone Investment Services LLC
full text here:
http://api.ning.com/files/*a4r05MtyolrNBP2bKtJdVI2LoanRo1*dqCeONXnDOKBmXGHYTr1exq4i4dOwgwbx7pZlVP4pD0T7NlDGT1mQTAYGFRrh6NI/GreekTragedy.pdf