US vs. European Economy

[albertiyang]

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)

 

[EdwardBaiamonte]

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??

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.

 

[DSGE]

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.

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.

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??

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.

 

[DSGE]

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??

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.

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.

 

[TakeAStepBack]

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.

The debt has been monetized for decades.
From Here:

During the four decades since the gold window was closed — the rules of the fiscal game have been profoundly altered. Specifically, under Professor Friedman's contraption of floating paper money, foreigners may accumulate dollar claims or exchange them for other paper monies.

But there can never be a drain on US monetary reserves because dollar claims are not convertible. This infernal engine of fiat dollars, therefore, has had numerous lamentable consequences but among the worst is that it has facilitated open-ended monetization of US government debt.

Monetization can be done in two ways. First, there is outright monetization, as is now being conducted by the Fed through its POMO program; that is, its daily purchase of $4–$8 billion of Treasury debt. Indeed, the Fed's QE2 bond purchases have been so massive that it is literally buying Treasury paper in the secondary market almost as fast as new bonds are being issued. During January, for example, fully 40 percent of the Fed's $100 billion bond buy was from CUSIP numbers less than 90 days old.

Needless to say, putting brand new Treasury bonds in the Fed's vault before they have paid even a single coupon is functionally equivalent to printing greenbacks. After all, under this type of high-speed round trip, virtually all the coupons from newly issued bonds will end up as incremental profit at the Fed and be remitted back to the Treasury at year-end.

Stated differently, in the present era of massive quantitative easing, newly issued Treasury securities amount to non-interest-bearing currency without the circulation privilege.

 

[expat_panama]

...my first post, so please forgive me if I cross any taboos...

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.

...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??...

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%.

 

[EdwardBaiamonte]

Of course debt won't be monetized.

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.

 

[EdwardBaiamonte]

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.

The debt has been monetized for decades.
From Here:

During the four decades since the gold window was closed — the rules of the fiscal game have been profoundly altered. Specifically, under Professor Friedman's contraption of floating paper money, foreigners may accumulate dollar claims or exchange them for other paper monies.

But there can never be a drain on US monetary reserves because dollar claims are not convertible. This infernal engine of fiat dollars, therefore, has had numerous lamentable consequences but among the worst is that it has facilitated open-ended monetization of US government debt.

Monetization can be done in two ways. First, there is outright monetization, as is now being conducted by the Fed through its POMO program; that is, its daily purchase of $4–$8 billion of Treasury debt. Indeed, the Fed's QE2 bond purchases have been so massive that it is literally buying Treasury paper in the secondary market almost as fast as new bonds are being issued. During January, for example, fully 40 percent of the Fed's $100 billion bond buy was from CUSIP numbers less than 90 days old.

Needless to say, putting brand new Treasury bonds in the Fed's vault before they have paid even a single coupon is functionally equivalent to printing greenbacks. After all, under this type of high-speed round trip, virtually all the coupons from newly issued bonds will end up as incremental profit at the Fed and be remitted back to the Treasury at year-end.

Stated differently, in the present era of massive quantitative easing, newly issued Treasury securities amount to non-interest-bearing currency without the circulation privilege.

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.

 

[TakeAStepBack]

No one knows. Some see the dice are loaded though.

 

[DSGE]

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.

The debt has been monetized for decades.
From Here:

During the four decades since the gold window was closed — the rules of the fiscal game have been profoundly altered. Specifically, under Professor Friedman's contraption of floating paper money, foreigners may accumulate dollar claims or exchange them for other paper monies.

But there can never be a drain on US monetary reserves because dollar claims are not convertible. This infernal engine of fiat dollars, therefore, has had numerous lamentable consequences but among the worst is that it has facilitated open-ended monetization of US government debt.

Monetization can be done in two ways. First, there is outright monetization, as is now being conducted by the Fed through its POMO program; that is, its daily purchase of $4–$8 billion of Treasury debt. Indeed, the Fed's QE2 bond purchases have been so massive that it is literally buying Treasury paper in the secondary market almost as fast as new bonds are being issued. During January, for example, fully 40 percent of the Fed's $100 billion bond buy was from CUSIP numbers less than 90 days old.

Needless to say, putting brand new Treasury bonds in the Fed's vault before they have paid even a single coupon is functionally equivalent to printing greenbacks. After all, under this type of high-speed round trip, virtually all the coupons from newly issued bonds will end up as incremental profit at the Fed and be remitted back to the Treasury at year-end.

Stated differently, in the present era of massive quantitative easing, newly issued Treasury securities amount to non-interest-bearing currency without the circulation privilege.

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.

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.

 

[DSGE]

Of course debt won't be monetized.

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.

None of that relevant. I see you ignored the argument though. Thanks.

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.

Well that's the great thing about the market: We don't have to speculate, the creditors do! If there were any significant chance the government would monetize the debt (effectively a default) creditors would stop lending to the US government.

 

[TakeAStepBack]

Ok.

 

[TakeAStepBack]

 

[DSGE]

Something funny?

 

[samjones]

you can compare various countries' public debt/gdp ratios and the US' 0.61 number is a lot less than say, Greece at 128%.

Yabbut you compared it to the world's worst offender who is teetering on the brink of default. Why not compare us to some random country, say Panama at 13.7%?

 

[expat_panama]

...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.... ...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??...

you can compare various countries' public debt/gdp ratios and the US' 0.61 number is a lot less than say, Greece at 128%.

Yabbut you compared it to the world's worst offender who is teetering on the brink of default. Why not compare us to some random country, say Panama at 13.7%?

You can and you did, and then we can get back on topic: US vs. European Economy, and the question about PIIGS (= Portugal, Italy, Ireland, Greece, Spain) vs America.

 

[samjones]

...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.... ...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??...

you can compare various countries' public debt/gdp ratios and the US' 0.61 number is a lot less than say, Greece at 128%.

Yabbut you compared it to the world's worst offender who is teetering on the brink of default. Why not compare us to some random country, say Panama at 13.7%?

You can and you did, and then we can get back on topic: US vs. European Economy, and the question about PIIGS (= Portugal, Italy, Ireland, Greece, Spain) vs America.

Spain is about the same as America. If you look at the entire EuroZone (aggregate debt to GDP ~%80) you see that debt is really only one piece of the puzzle. Unemployment is a big factor too.

 

[expat_panama]

...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.... ...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??...

...debt is really only one piece of the puzzle. Unemployment is a big factor too.

What I'm getting here is that Al's working with these puzzle pieces one at a time, but I'll let him speak for himself.

 

[EdwardBaiamonte]

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.

Why not wait till college before you comment on these matters? The Fed is in fact monetizing debt by expanding its balance sheet and surprise, Bernanke (Chairman of what they call Federal Reserve) admits to it in open Senate hearings . And, there seems no need to modify FRA since Fed can do anything it pleases, including buying boat loads of toxic crap, and has with hardly a whimper from anyone except Ron Paul.


Moreover, Greece is in trouble because everyone lent them money. So, counting on the good sense of lenders as regards sovereign debt is no help at all!!

 

[DSGE]

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.

Why not wait till college before you comment on these matters?

I have a degree in economics and I'm starting a masters this year. So... if I can lend some advice right back to you, maybe you should wait until you've done more than Econ 101 before you comment on these matters?

The Fed is in fact monetizing debt by expanding its balance sheet

Which s not monetizing government debt. It's conducting open market operations in the secondary market for treasuries.

and surprise, Bernanke (Chairman of what they call Federal Reserve) admits to it in open Senate hearings .

Okay. So you can find me the transcript or video of that then?

And, there seems no need to modify FRA since Fed can do anything it pleases, including buying boat loads of toxic crap, and has with hardly a whimper from anyone except Ron Paul.

Nope, can't do anything it pleases. It can only do the things the FRA allows it to do. Monetizing government debt is not one of those things.

Moreover, Greece is in trouble because everyone lent them money. So, counting on the good sense of lenders as regards sovereign debt is no help at all!!

How is Greece in trouble? If they default, their problem is that nobody will lend to them for a really long time. But hey, according to you, sovereign creditors don't have any sense. So I guess there's no problem then, Greece can just default and people will keep lending to them.