The Usa Is Not Europe

As noted last week, the municipal bond panic has been blown well out of proportion.  While the state budget woes are serious issues and will require substantial cutbacks and perhaps even tax increases, it’s important to keep things in perspective and avoid comparisons of the USA and Europe.  First of all, the state budget issues as a whole are simply not comparable.  Figure 1 from a recent report out of the CBPP puts the historical debt levels in perspective.  As you can see there is nothing that far out of the ordinary currently occurring:

More importantly, however, one must recognize the operational differences between the USA and Europe.  Europe has no central treasury.  They are not truly politically unified.  They are a monetary union of individual countries with individual political systems.  While they have one central bank they still lack the key ingredients that makes them even remotely comparable to the USA – a central treasury and centrally unified political system.  This, combined with the true unity of the USA exposes the vast differences between the two.

Make no mistake – I am by no means encouraging reckless spending policies at the state and local level, however, we must recognize the operational reality at hand.  Localities can and likely will default in the coming years, however, an event as potentially catastrophic as a state default would be a purely political decision (as the US federal government can never not have the funding to aid its states).  The Europeans are unwilling to unify and provide aid to their neighbors.  I am confident that Americans remain unified despite the growing political divide.

A Euro crisis cannot truly occur in the USA because the purpose behind being a “United States of America” is acknowledging that California’s problems are also New York’s problems.  This by no means says we should encourage profligacy or irrational spending, however, a state in dire consequences (such as potential bankruptcy) must be helped by its brethren.   If we fail, as a country, to recognize this, then we have to all very seriously reconsider the purpose of our union to begin with.   Arguments that say otherwise are divisive and purely politically driven.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

by Andrew Wilkinson, Senior Market Analyst at Interactive Brokers

Read more at The Pragmatic Capitalist