I couldn’t find a picture of a pig going through a windshield, so a horse will have to do.
The chart below shows a comparison of country Debt to GDP ratios. Remember that Reinart and Rogoff in their book This Time is Different prove that once this ratio passes 90%, bad shit happens. The chart for the US is actually understated because it leaves out Fannie and Freddie and Sallie and the rest of the guys. Our real debt to GDP ratio is 103%. Only Italy, Greece and Japan are beating us. But we are catching up fast – $3.8 billion per day added to our National Debt.
Japan cannot tax themselves out of their predicament. They have the oldest population on earth. They’ve depleted their savings. If their interest rates rise to even 3%, they’re toast. They are the black swan that will go through the windshield and trigger another worldwide collapse.
For some perspective on the European sovereign debt crisis, today’s chart illustrates the forecasted 2012 debt to GDP ratio for each of the PIIGS (red bars) plus a handful of today’s major economies (blue bars). While the PIIGS are currently enduring relatively high debt loads, it is noteworthy how some of the relatively safe nations/bond markets (e.g. United State and Germany) are not far behind. These relatively high debt loads are of concern as they could lead to higher taxes sometime in the future and can risk fiscal crises if bond holders sense an increasing risk of default. The current crisis in Europe provides a clear example of the bond market’s reaction (i.e. higher bond yields) to increased default fears. This leads to a very interesting case study that is Japan. With a debt to GDP ratio of over 200%, the Japanese 10-year bond yield is a relatively low 0.83%. Why? At the moment, the bond market feels that the Japanese have the ability to repay their debts — in part due to Japan’s perceived ability to raise taxes. To that end, Japanese Prime Minister Yoshiko Noda just won opposition support for the doubling of the nation’s sales tax to 10% by 2015. So it’s not just the amount of debt but also convincing your banker that you are good for it.
Administrator says:
Manufacturing in the eurozone has returned to levels like those of the last recession. This is another sign that the area has entered a second recession. But the data show that this new recession my be worse than the previous one.
Markit reported its “Flash Eurozone PMI Composite Output Index at 46.0, unchanged from May’s 35-month low.”
Germany has become a drag on the region’s economy just as much as it was a help to the last recovery:
By country, output fell in Germany for the second month running, dropping at the fastest rate in three years. Marginal growth in services was offset by manufacturing output falling at a rate only slightly below the near three-year record seen in May.
In addition to the current trouble, the mood about the future has flagged. Chris Williamson, chief economist at Markit, said:
Of particular concern is the near-record deterioration in business optimism, combined with marked falls in employment and purchasing by companies. This suggests that firms are preparing for conditions to worsen in the coming months, with the darker outlook often attributed to uncertainty caused by the region’s ongoing economic and political crises.
As usual, businesses that prepare for the worst help to create it. Whatever modest job creation may had taken hold last year has been crushed, and along with it consumer sentiment. Businesses appear to have halted all but the most essential spending, which will put further pressure on jobs.
The austerity plans for nations like Greece and Spain are founded in the notion that these countries have businesses and people who can be taxed for the revenue that will be matched to lower government spending. But shuttered factories and people out of work do not create income that can be taxed.
Douglas A. McIntyre
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22nd June 2012 at 9:05 am
John Coster says:
And don’t forget the ongoing nuclear disaster in Japan which could actually get much worse at any moment. If the spent fuel rods etc. stored at Unit 4 are somehow maintained and there is no collapse, the ongoing radiation will still continue. If the worst happens, what happens to Japan and the world economy? Even if the worst is avoided, how will this ongoing disaster effect global markets? What happens if large regions of Japan become uninhabitable? Talk about a black swan!!
Don’t worry. Our government is putting its resources into more addressing more serious threats like underwear bombers.
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22nd June 2012 at 12:01 pm
DaveL says:
Is it true that if you lift up that tail you’ll see Nancy Pelosi?
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22nd June 2012 at 12:12 pm
AWD says:
That chart is way off even though it says 2012. The U.S. is about 103% of GDP today, the chart is showing about 85%. How can you expect a cogent thread when your data is incorrect?
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22nd June 2012 at 1:03 pm
Administrator says:
The chart is showing public debt. I explained it in my lead in you dipshit.
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22nd June 2012 at 1:14 pm