In America, politicians mistakenly believe they can have it all. To stimulate economic growth, politicians have continually made big promises, without any way to pay for them. This type of imbalance has led to a government debt level that now exceeds $16.0 trillion—an absolutely insane amount.
With the government debt limit about to be hit yet again, we must ask ourselves: do Americans want to be European?
With the current level of tax and spending imbalance, government debt is set to grow higher and higher, even with a slight increase in economic growth.
This point was best explained by the Swedish Prime Minister, Fredrik Reinfeldt, when he stated on Bloomberg TV, “It’s not sustainable for a country to try to have European levels of expenditure with taxation levels like the United States has.” (Source: Carlstrom, J., “Sweden Warns U.S. Against Targeting Welfare With Tax Deficit,” Bloomberg Businessweek, January 25, 2013.)
This point is essential for all Americans to consider. Economic growth is flat in the U.S.; and while politicians talk a big game, we must consider how we’re going to pay for all of these promises. The more government debt increases, the more constraint it puts on the future for all Americans, lowering potential economic growth levels.
To put the difference into context, the European commission estimated that the budget deficit for Sweden will be 0.3% of gross domestic product (GDP) in 2013, as compared to a budget deficit for the U.S. of 7.3% of GDP. Even the European Union (EU) as a whole will only have a budget deficit of 3.2% of GDP. (Source: Ibid.)
The advantage of having … Read More
One of the most important things for all investors to remember is that the global economy is tightly tied together. Gone are the days when one country could, in isolation, remain immune to the effects of the global economy. With the problems that America has endured following the Great Recession, we certainly can’t look to the rest of the world to help our economy accelerate.
In addition to weak organic economic growth, the stimulus plans implemented by nations around the world have created massive levels of government debt. This government debt is pervasive throughout the global economy. While I’ve commented many times about U.S. government debt and the problems we will incur in the future, America is not alone. From Europe to Asia, the global economy is awash in huge levels of government debt.
The real trouble is that in spite of trillions of dollars of government debt, the global economy can’t accelerate. New data regarding the Japanese economy is quite clear in this matter. Japan’s economy decreased during the September quarter by 0.9%, which is an annualized rate of decline of 3.5%. (Source: “Japan’s economy shrinks, recession looms,” Reuters, November 12, 2012.)
The Bank of Japan has a policy meeting next week and another on December 19–20. Considering the trillions of dollars Japan spent over the last 20 years trying to revive its economy, the only result has been a massive increase in government debt. According to the International Monetary Fund (IMF), Japan’s government debt as a percentage of gross domestic product (GDP) is estimated for 2012 to be approximately 230%. This compares to the government debt as a … Read More
One of the common themes around the world is the growing level of government debt due to high budget deficits. Budget deficits occur when spending is greater than revenue. Taxes are the main source of revenue for governments; taxes decrease with a slow economy. A slow economy means fewer employees, which means less revenue from income taxes and lower taxes on goods purchased. This increases budget deficits, which then adds to the rising total of the government debt.
This is not a problem that exists solely on American shores. A big issue around the world is how to tax the wealthy. While many in America believe that increasing taxes for the wealthy will decrease the budget deficits and, in turn, eventually decrease the government debt, the problem is more severe in some nations.
In a recent study to determine the number of Greek citizens who pay taxes, approximately 70% of Greeks were found to underreport their income. The results from the study showed that undeclared income totaled in excess of 10% of Greece’s gross domestic product (GDP) for 2009, or 28.0 billion euros. Because this income was not declared, the Greek government lost 11.2 billion euros in taxes, or approximately four percent of GDP. (Source: “Wealthy Greeks Still Don’t Pay Taxes,” Der Spiegel, November 1, 2012.)
That is a truly staggering amount relative to GDP, which is exacerbating the budget deficits and the growing government debt. This lack of revenue is pushing the government to enact further spending cuts, of which the average citizen is feeling the full effects, including massive pension cuts. Reducing budget deficits is extremely important for … Read More
Recently, I penned an article describing Japan’s government debt woes. The country has a 220% debt-to-GDP ratio, by far the largest government debt-to-GDP ratio in the world.
I also noted that Japan’s government debt was circulated within the country: over 90% of Japan’s government debt is owned by the Japanese people and the Japanese corporations.
That is about to change, as Japan’s demographics reveal that more people are retiring than entering the workforce. As more people retire, they will naturally spend the money they saved and not buy new government debt.
As a matter of fact, for the first time in nine years, the Japanese Pension Fund sold more bonds than it bought because of the fact that more retired people are asking for the money they saved.
As if this situation weren’t bad enough, other circumstances are hurting Japan’s government debt situation. Japan relies very heavily on exports for its economic growth.
Its largest economic partners are China, Europe, and the U.S. Since China’s economic growth is slowing and the U.S. economy is rolling over as well, Japan’s exports are weakening, impacting the country’s economic growth. Since Europe is in a recession, this further exacerbates the decline in Japan’s economic growth model.
Due to the unfortunate tsunami disaster that ravaged the country, Japan has no energy sources to speak of and so must import all of its energy needs. Higher imports of energy coupled with fewer exports due to the lack of economic growth worldwide means the country has now begun to run current account deficits.
In 2011, Japan had a current account deficit for the first time in … Read More
We live in a very unusual time. With the European debt crisis on the market’s mind daily, and as China’s economy slows and the U.S. economy falters, the world has become more complicated.
Economic slowdowns and/or recessions are normal, but what is unusual this time around is the fact that interest rates in many countries are going negative.
Investors are paying certain governments to hold onto their money. Government debt is not an investment vehicle anymore; it has become a safety deposit box for investor money. Negative interest rates are signaling the fear investors have.
Just in the last month, Germany’s two-year government debt bond yielded a negative interest rate of -0.002%. Investors believe that should the eurozone fall apart, Germany’s economy will be one of the few to withstand the financial crisis storm. As such, investors paid for Germany’s government debt, because they believe they have assurances of getting their money back.
The Netherlands, another European Union member, is one of the few countries with a AAA credit rating left in the world. Its economy has certainly suffered from the turmoil in Europe, but with low unemployment and relatively low debt-to-GDP, investors believe it is a safe place to park their money. The short-term government debt of the Netherlands was sold at negative interest rates, as well, in the last month, as investors put interest rate returns aside for the safety of their money.
Two countries outside the European Union that have seen their currencies skyrocket and their interest rates fall in the last few months are Switzerland and Denmark.
These countries have attempted various methods to try to … Read More
There seems to be a collective sigh of relief among central banks and investors around the world that a pro-eurozone coalition government has been formed in Greece—at least for today.
While the debate rages on what global effects Greece leaving the eurozone would have on financial markets and economies around the world, no one is talking about what is best for Greece.
Many economists believe the worst thing Greece could do is leave the eurozone, because it would cause such havoc and lead to severe economic pain for the people of Greece.
The latest figures from the eurozone have the unemployment rate in Greece at 22.6%, while youth unemployment is 52.7%. Greece’s economy has been contracting for five years straight and will continue to contract, which means unemployment will worsen. This is better than leaving the eurozone?
Greece’s government debt exceeds its gross domestic product (GDP). As the economy continues to contract, government debt will only get worse. The eurozone is asking Greece to implement austerity measures that will hopefully see Greece reduce its debt-to-GDP to 120% by 2020.
That’s not an improvement; it’s a mitigated disaster. There is no way Greece can pay for its debt. I’m not suggesting that declaring bankruptcy and starting over again is a painless process; but at least then the Greek people can start over and begin to grow again.
The alternative is to watch government debt that can never be repaid continue to rise, while the economy contracts and the unemployment rate continues to soar.
In the meantime, the National Bank of Greece is preparing to sell its most prized resort along … Read More
As the political process continues in 2012, more concern grows everyday that the oncoming deficit crisis is going to escalate even further into a full blown financial crisis. Recent reports of executives from many large firms on both sides of the political spectrum have been meeting with politicians to try and deal with this financial crisis head-on. Corporate executives know that a financial crisis is bad for business, bad for profits, bad for jobs and ultimately bad for the United States. Even though this seems evident, politicians on both sides have let the budget deficit continue for far too long. It is a shame that politicians can play with the lives of U.S. citizens and allow this financial crisis to escalate to a point of extreme danger.
This financial crisis is not something to be taken lightly. Without a deal by the end of the year, the tax cuts ending will result in $1.2 trillion in spending cuts over a decade. Almost $100 billion is scheduled for next year in cuts to the defense budget alone. This level of uncertainty regarding the financial crisis is putting businesses leaders on hold as to whether or not to expand their business and hire more people. No one can expect business leaders in a financial crisis with an increasing deficit to have any level of confidence in the current crop of politicians.
Things are definitely bad when executives on both sides are calling for both Democrats and Republicans to work together to solve this financial crisis. This is no small matter, as some estimate GDP next year might be reduced by over 2.5% … Read More