Friday, July 8, 2011

us budget negotiations - end of shuttle program

In the rush to devote headlines to Ireland and Greece, commentators overlook a greater threat - US default.

Here is the scariest graph I have seen in a long time:

Source: Bbc 7th July 2011

First scary portion - history Bush and Clinton

Look at the portion 2001 to 2002 - that downward slope on the blue line shows a drastic fall in revenue - either an economy shrinking or a tax cutting agenda.

Clinton left office January 20, 2001 however for much of fiscal 2001, the tax policies put in place in 2000 would have been in effect.

Do a websearch for Clinton+Greenspan, and form your own opinion as to what happened there.

I will not even comment in detail on 2001->2008 and Bush - look at the Blue revenue line versus the amount being spent - frightening.

Second scary portion - needs revenue climb from 14% to 20% of GDP

Sales, Sales, Sales.

Exports, Exports, Exports

Those two sentences are, perhaps, the preferred way of increasing revenue - sell more outside of your own country.

I do not doubt the need to increase taxes drastically and some of that activity has already happened.

If this makes uncomfortable reading, then go back and look at the graph again - the gap between the lines must be narrowed, and narrowed quickly!

The US economy needs to grow (internally or externally) by 6% in two years, a staggering challenge.*

Are Obama and Bernanke the team to do it? I hope so.

*Germany just managed 3% growth, however they are the outlier.

The end of the Space Shuttle program:

Most folks with an interest in Science, will probably feel a tinge of regret when the Space Shuttle program at Nasa closes. Hey, personally, I love the Shuttle.

Go back and look at the brown line in that graph. However it is achieved, spending needs to come down.

In the UK we are having to make difficult choices also, it is not easy. We recognise the need for cuts, but feel a natural hesitation when a final decision is made to cut some funding area.

Debt as % of GDP - surely that is the measure of 'financial strength'?

Speak to a bank about personal financial difficulties and they will ask about:
  1. How much you spend per month, versus how much you earn per month
  2. Your total debt versus your annual income.
The graph I referred to earlier is (1) and Debt as a % of GDP is closer to (2)

The UK has a truly shocking picture when viewed under the (2) microscope - the UK as a nation in 2011 owed 82% of GDP (Up from 75% in 2010)

Is America worse?

Well here is the thing - I am not going to argue the case, however taking what is known for sure - a GDP figure for the US of 15 trillion is about right.

If US debt stood at 5 trillion then that is 30% of GDP as debt (very roughly)

However official IMF figures have US listed as 99% of GDP as debt.

That figure fits broadly with the picture painted on

So where is the distinction - who can say 5 trillion or 15 trillion?

A figure of $4.5 trillion is doing the rounds in news articles at the moment, inspired by the narrower definition 'US bonds owned overseas'.

In the rush to talk about 'owned overseas' some of those articles are popularising a figure that represents less that half of total debt.

The UK situation 75% of GDP - how shocking?

Just so. Looking at the top 50 'financial offenders' :) we see that 82% buys the UK a place in the top 30. The UK ranks 22nd between France and Canada in the list.

Source: Scrape from figures for 2011 (see link at the end of this article)

How did the UK get into that position? The financial sector, as a proportion of all business in the UK is very significant.

When the banks failed, the bailout was big.

How did the UK banks fail, was it property speculation like Ireland, or subprime like America?

There was in the UK an over-reliance on 'the housing market' to drive growth, it wasn't the overheating that killed it (like Ireland), but the lack of new entrants due to low growth elsewhere in industry.

The UK did not have the subprime mortgage situation of the US, however personal loans and credit cards to 'subprime' candidates, had been rife for a decade.

Here are some questions about the interplay between countries that might twist your noggin :)
  • In borrowing the US a trillion dollars, did China provide the rope with which it would hang itself?
  • If China had instead stashed that trillion in the worlds biggest mattress, would there have even been a financial crisis?
  • When MBNA arrived in the UK 8->10 years ago, offering low interest credit, to a wider range of folks, was that the start of UK personal 'subprime'?
I mentioned China twice in those points, so let me answer that second point, to show this is not an attempt to blame China.

Showing a fool your money and offering to borrow it to them is not a crime.*
Lack of oversight and appetite for greed, will fuel the sort of activities that existed in many countries prior to the recognition of a crisis.

*Part of the solution this time around is to make it socially unacceptable, for banks to lend to 'high risk' individuals.

The reason it was a 'Global financial crisis' was in part due to the interconnectedness of capital borrowing, however it was Global also, because so many countries were 'at it'.

An appetite for risk with governments afraid to allow institutions to fail, it could be the stuff of fiction. Unfortunately not.

It was 70 years from the Great Depression to the Global Financial Crisis.

It will happen again, but the big question is whether it will be in 2070 or have human memories got shorter or longer than this time around.

In 2070 perhaps somebody could do a graph showing the maximum % mortgages available in past decades. 80% mortgage means you have to have 20% capital yourself. 90% mortgage means you have to have 10% capital yourself.

When the world is offering 100% mortgages, then we will again be asking for trouble.

The Euro as a gravytrain - why attitude matters:

This applies to recent entrants aswell as those who joined at the outset.

If within your own country, leading politicians, are of the opinion that joining the Euro is good because it allows you to be lax financially, and have others share the pain, then...

You are heading for trouble.

Were you in Ireland or Greece around the time that those countries joined the Euro? Please add something in the comments of this post if you have some first hand experience.

Did Ireland view the Euro as a way of maintaining the gravy train?
It may be that Ireland viewed joining the Euro as a way of cosying up to partners who might then be shy, about cutting the generous CAP allowances for fallow fields.

Apparently Greece falsified some key economic statistics, in order that it might meet the entry requirements for the Euro.

Banking is an organic system, if you are dishonest, or think that sustaining an economy on generous allowances from other members, is the way to go, then the wheels will come off at some point in the future.

Borrowing to countries 'extremely high risk' - French Banks:

Half of the entire Greek debt is made up of money loaned by French banks.

Why did (and do) these banks loan to people who are considered 'too risky' by other European lenders?

This is a very different situation from Argentina before it's crisis, where Wall Street and 'private' European investors were the ones doing the ready lending.

Bonds with no maturity date - Argentina II:

One of the contributing factors, as to why, the crunch in Argentina, came so late and so hard, was the lack of a by when in loan agreements.

Bonds have a fixed term.

When you start 'rolling over' terms or extending the life of a bond, the warning bells should sound.

This is why with the Greece situation at the moment, a 'rolling over' of debt will rightly be treated as a default marker.

If misguided financiers choose to pressure bondholders into accepting flexibility around when the bond terminates, then that is just storing up more trouble for the future.

The financial crisis in Argentina should have happened in 1990 rather than 2000.
By rolling over bonds and introducing greater flexibility into repayment dates of debt, external financiers were making a bad situation worse.

Lack of transparency - a risk to any financial system:

By allowing large financial transactions through private accounts, there are some organisations who, it might be speculated upon, are contributing to financial instability.

When a government and / or large enterprise has access to a clearing system, that allows huge financial transactions to go unpublished, then the system suffers.

Examples of transactions that might pass through such a system:
  • Private (and secret) buying of debt from default countries
  • Private (and secret) payments as a result of winning contracts
  • Private (and secret) reserve accounts held by countries who are on notice of economic sanctions.
Any 'bona fida' banking service which allows transactions of £5000 or more, must register a 'Transaction report' with European or American authorities.

How companies like Clearstream and Clearstream account holders such as Société Générale and Seimens can justify a service that does not adhere to 'Transaction reporting requirements' is beyond me.

That is not to say that Clearstream has just European users, there are American companies involved also.

Notes and Further Reading:

On a personal level, I have no great affiliation to any American president.

I am neither a great supporter nor strong detractor of Clinton, Bush, or Obama.

I simply did some light analysis of past financial performance, and commented on the challenges that the current administration face.

Can president Clinton claim that he was just following advice? Possibly, although I am sure there are strong arguments for and against such claims.

I have no intention of reading "My Life", however there must be at least some mention of finance and economy in it somewhere.

Further Links:
A comment attributed to Hilary Clinton regarding the current levels of Chinese investment in US:

China now holds $755 billion in U.S. securities.
I have no way of verifying the actual figure, a more recent article by the Guardian puts the figure at $1,152.

Just a final note about rating agencies...

Fitch, Moodys, Standard & Poor - all US rating agencies right? Wrong.

Fitch is a subsidiary of the French company Fimalac SA.

The Bbc program 'All watched over by machines of loving grace', provides an interesting backdrop to the global financial crisis - apparently we asked for it.

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