US vs. European Economy

Discussion in 'Economy' started by albertiyang, Feb 1, 2012.

  1. albertiyang
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    albertiyang albertiyang

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    Hey everyone, this is my first post, so please forgive me if I cross any taboos or please let me know (I did read the guidelines). Anyways...

    I understand that the European economy is not doing very well right now and it's because of mounting debt problems. I believe this is because the debt to deficit and debt to GDP ratios for some European countries (specifically the PIIGS) are close or past 1, meaning they owe more money than they make.

    Also the problem with the European economy is that they all share one currency, "the euro" and also are heavily invested in each other. If one government were to default, then this would cause some sort of chain reaction and cause other European countries' economies to collapse.

    To my knowledge the US debt is close if not more than the US GDP (15-16 trillion debt vs. 15 trillion GDP) and also China is heavily invested in our debt (i think...).

    Why is there no panic around the US defaulting or what makes the US so special vs. European countries when we have about the same debt to GDP ratios??

    Some Hypothesis I had:
    -US tax rates are not as high as European tax rates, and so a last ditch effort to save our economy would be to raise taxes?
    -Most of our debt is owned internally and thus not as big of a problem? (I believe China is the only major investor in our debt)
    -On a side note does anyone know the credit rating for other big countries? like Russia, China and the European countries? I know that ours was recently demoted from AAA+ to AAA I think.

    Thanks! Looking forward to friendly discussion and would love to see sources (if you're allowed to post links)
     
  2. EdwardBaiamonte
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    EdwardBaiamonte Gold Member

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    very simple!! They are more responsible than we are. We are set up to simply print any money we need while the Europeans for the most part know better and so are not as prepared to do this.

    In short, we'll print what we need while Europe will pay back what it owes in real money, we hope.
     
  3. DSGE
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    DSGE VIP Member

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    Well, be careful what you mean there. "Owe more money than they make". Remember that debt is a stock and income is a flow. If you have an annual income of $50,000 and you borrow money to buy a house that costs $200,000, your debt-to-income ratio is 400%! Is that a problem? No. Because $50,000 isn't your total lifetime wealth, it's the amount you make per year. And you don't have one year to pay down your mortgage debt, you've got 30 years. Similarly, GDP is a country's income per year, and they have many years to pay the debt. Japan has a debt-to-GDP ratio of over 200%! Does that mean that they'll never be able to pay it off? Obviously not, otherwise nobody would continue to lend to them.


    As you mentioned before, those countries all share a currency. They don't have control of their money supply like the US does. So there's lots of risk that a weakening of their economy will result in plunging nominal GDP (which is the resources available to pay nominal debts). Falling nominal GDP increases the real burden of debt and makes it much harder for the country to pay back, greatly increasing their chances of default.

    That isn't true for the US. They retain control over their monetary policy, so if economic weakness causes NGDP to fall too much the Fed will respond by expanding monetary policy to stop that.
     
  4. DSGE
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    DSGE VIP Member

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    Monetizing your debt is... really a kind of default. If creditors had any expectation that you'd erode the real value of the debt so much by monetizing it, they just wouldn't lend to you in the first place. It's exactly the same as saying "thanks for the loan but we're only gonna pay back 1/3 of it".

    Of course debt won't be monetized. The Fed isn't allowed to give money to the US government and it has a 2% inflation target. The only way US debt could be monetized is if congress passed a bill, and that's extremely unlikely to happen since everybody is already shitting themselves over "hyperinflation" from QE.
     
  5. TakeAStepBack
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    TakeAStepBack Gold Member

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    The debt has been monetized for decades.
    From Here:

     
  6. expat_panama
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    expat_panama Silver Member

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    Your input is most welcome. The fact that so very few people here understand the limits of their knowledge makes your presence here rare and welcome indeed.

    A third of that so-called US debt is money the gov't owes itself so the US public debt (what the gov't owes anyone else) is 'only' $9T. Big deal. On this site you can compare various countries' public debt/gdp ratios and the US' 0.61 number is a lot less than say, Greece at 128%.
     
  7. EdwardBaiamonte
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    EdwardBaiamonte Gold Member

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    of course inflation was 4.0% over the last 40 years when there was no urgent need like a $16 trillion debt headed to $30 trillion. Minimum wage was $1.00 a hour in 1960. Today its $8.00.

    Maybe they will just levy a one time $125,000 tax on every household in America then raise taxes 25% on everyone from then forward.
     
    Last edited: Feb 2, 2012
  8. EdwardBaiamonte
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    EdwardBaiamonte Gold Member

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    Well who knows how it will turn out but you must keep in mind that the Fed can inflate and deflate at will to keep prices steady. In theory it is possible that we have entered a new era in central banking where the major monetary problems can be solved short of depression or serious recession.
     
    Last edited: Feb 2, 2012
  9. TakeAStepBack
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    TakeAStepBack Gold Member

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    No one knows. Some see the dice are loaded though.
     
  10. DSGE
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    DSGE VIP Member

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    First off, a Mises.org article? I see you've gone out of your way to find the most unbiased and well referenced news source. [​IMG]

    Second, "for decades"?

    Third, there is no monetization happening there. The purchases are occurring in the secondary market. Government debt can not be serviced by the Fed without obliging the Fed to do so by modifying the Federal Reserve Act. Even if you want to engage in semantics and count the seigniorage the Fed earns and remits to the Treasury as "monetization", that's a negligible proportion of total government debt. The bottom line is, the trillions of government debt can't be payed off by printing money unless the FRA is modified.
     

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