"Just as it was in the days of Noah, so also will it be in the days of the Son of Man. People were eating, drinking, marrying and being given in marriage up to the day Noah entered the ark. Then the flood came and destroyed them, sweeping them all away." -Luke 17:26-28
The complacency that we have as a nation and the lack of action we demand from our supposed leaders continues to amaze me. We have nations in Europe blowing up economically for all to see, yet we continue to think "that can't happen here". If we don't make some changes, I assure you the flood will come here eventually. And consider how fast it can happen -- in 2009 Greece was borrowing money for 2 years around 2%. Today that costs them over 20%. That should be a warning to clowns like ex-Treasury Secretary Larry Summers and uber-idiot Paul Krugman, who have been recently advocating taking advantage of low Treasury yields to borrow trillions more in order to undergo a huge new stimulus program. A problem of too much debt cannot be solved by more debt.
Absolute Return Partners out of London puts out a must-read piece every month. This month is no different with their "Five Misconceptions Squashed". This one in particular caught my attention:
The sovereign debt crisis is a European problem:
No, it is a global issue!
Moving on to the problems in Europe, few would disagree that Greece is stuck in the deep end of the cesspit right now. So deep, in fact, that there does not seem a way out for them. But, as we all know, Greece is not alone. Other eurozone members are not far behind in the ugly contest, but that is about as far as investors agree. A small but relatively vocal minority is crying wolf on countries such as the UK, US and Japan, but the vast majority beg to differ. Here is my take on it.
To begin with, in order to fully comprehend the magnitude of the sovereign debt crisis, one has to acknowledge that debt/GDP is a misleading measure of sovereign states’ ability to repay their debt. There are several reasons for this. As a starter, the numerator in the equation (the debt component) does not pick up all sovereign liabilities. For example, here in the UK, unfunded pension liabilities to civil servants are not included in the official debt numbers. UK debt/GDP would jump by almost 60% if one added those liabilities to the equation.
Secondly, the ratio is a backward looking indicator. We all know that age-related liabilities will grow dramatically in years to come. Such liabilities are completely ignored in the debt/GDP ratio. Thirdly, and most importantly, what really matters are government revenues, not GDP. In the corporate world, in order to measure a company’s ability to repay its debt, you monitor debt/revenues and debt/EBITDA. Applying the same logic to sovereign debt, you should focus on debt/tax revenues instead.
Think about that -- when totaling up all debts and liabilities, only Japan (a bug in search of a windshield) and Greece (the biggest basket base on earth) are worse than the United States. In fact, Portugal and Ireland have better ratios and they had to be bailed out! I assure you, there will be no one to bailout the U.S. if we do not get our fiscal house in order.
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