Angry Guy: USA Tops The Busted Nations List

by Fintan Dunne – 17 Sept., 2010 – FintanDunne.com

Yes, I’m worked up again. But I can’t figure out if I’m most angry with: 1) the financial press who pawn off cheap clichés as deep analysis; 2) financial gurus who lob opinions from atop their ivory towers; or 3) the politicians who have betrayed America with all the enthusiasm of born traitors.

Y’see I just found out that America is the most Busted! advanced nation on the planet.

I don’t mean that as a trite, throwaway, unfounded, cocktail-party snippet of mere gossip.

I mean that the U.S.A. is the definitive global economic basket case. I mean I just found out that Americans (in hard, objective financial terms) are in a far worse debt sinkhole than even the notorious Greeks. 

I’ve been living in a fantasy. So have you.

In my dreams America was admittedly jacking up the national debt like payback time will never come. But all within reasonable limits, I thought. The financial gurus told me that US national debt was higher in relative terms at the end of World War II. And the financial press relentlessly intoned a lazy conventional wisdom that America’s ‘Debt to GDP’ ratio was reassuringly within acceptable limits.

You must be deaf if your ears haven’t been jammed up ten times a day with the catchphrase of : “Debt to GDP ratio.”

But I just found out that Debt to GDP is a useless metric for determining a nation’s relative indebtedness!
 

I’m going to tell you why, but without fogging your brain with macroeconomics. I prefer to ‘de-complicate’ financial mumbo-jumbo so that even idiots like me can get it.

And I get it! Boy, do I ever. So here goes:

A nation’s GDP is simply it’s annual gross domestic product: it’s total productive output for a year. That’s akin to the annual gross turnover for a business. Now let’s play an investor game. You are the investor trying to figure out whether I or my brother are going to get the $100,000 you have to invest.

I have a dinky tool hire shop in a glorified shack near my home. I turn over a mere $200,000 a year. My brother runs a 2,000 sq. ft. apparel outlet in a nearby mall. He turns over $2million a year.

For a $100,000 loan, his Debt/GDP ratio is a mere 5% and mine is a whopping 50%. On that basis I’m a ten times riskier investment. But hold on…….

Actually I take home half my annual turnover as profit, bagging $100,000 a year. My brother is being creamed by high mall space rental and keeps his clothing prices shaved to minimum to attain his $2million GDP. He now only takes home $50,000 a year as profit. So if I get your $100,000 loan I will have a Debt/Revenue ratio of 100% and his will be a huge 200%.

In the real world, he’s the far riskier investment bet. Net profit revenue is the key bottom line. In the real world, only an idiot investor would use annual turnover(GDP) as a guide.

But the rarified heights of macroeconomics is apparently not the real world. Because the unfailing chant of the massed financial gurus is always : “Debt to GDP ! “

As if that mattered a whit. It doesn’t.
 

Thankfully there is at least one economic analyst with enough savvy to sweep aside the Wizard of Oz curtain of Debt/GDP. And reveal behind it the appalling truth about America’s finances.

Writing a research report for clients, Morgan Stanley London executive director, Arnaud Mares a few weeks ago dropped this bombshell:

“….debt/GDP is the most widely used debt metric, but we believe
that it is a very inadequate indicator of government solvency.” Link

Well, in the light of our investor example above you now know this. So it’s no surprise to you that he continues:

“ It is not GDP but government revenues that matter….
Whatever the size of a government’s liabilities, what matters
ultimately is how they compare to the resources available to service them.“

Damn right. So first let’s look at the reassuring, yet useless, Debt to GDP ratio of the USA – in comparison to other nations:

Not bad. Lending to the US Gov. seems to be a low risk investment.

But when you look at debt in proportion to the available government revenue to repay that debt, a scary and rarely seen picture emerges:

Holy Deficits, Fedman! When you look at it that way (the real way) the US is a far riskier investment than even Greece, Ireland, Italy and Portugal. The high ranking comes from that low US figure of 14.8 cents of annual Federal revenue for every dollar of GDP. The comparatively low tax rates in the US versus it’s European counterparts is the main reason.

So maybe we could raise tax rates in the US to fill the revenue gap? Not a solution, for two reasons. The law of diminishing returns means that raising taxes drives taxable income underground. Secondly, the ascendant Tea Party politics of the US means that come November, 2010 a new horde of anti-tax representatives may effectively block such a tax move.

So the US is likely stuck with this world-beating 350%+ Debt/Revenue ratio.

All the above implies that somebody, sometime is going to get screwed. Or as Arnaud Mares says:

” The question is not whether [governments] will renege on their promises,
but rather upon which of their promises they will renege,
and what form this default will take. “

Taking careful note of the steely expressions on the faces of voters, Mr. Mares reckons that those bondholders foolish enough to lend to the US Gov. will be the ones to take the hit:

” [The] constituency of the elderly is [the] biggest competitor to bond holders because of the considerable size of the direct claim it has on the government balance sheet in the form of pensions, social security and health insurance, etc. The more reluctant they are to relinquish these claims, the higher the risk for bond holders.”

Considering the high male and retiree age profile of the Tea Party and the movement’s determination not to be the ones left holding the fiat currency, fake-plastic debt baby, bondholders should think twice.

Who are those bondholders? Some are nations; many are already bankrupt TBTF cartel banks in the US and Europe; and more are the mega wealthy for whom the last two decades has been a bonanza. I haven’t spotted any voters with the interests of those groups foremost in their mind.
 

Despite Arnaud Mares’ ground-breaking analysis, you’ll still see “Debt/GDP” bandied about daily by a financial press too dumb to know better, and by financial gurus who should know better, but seemingly missed this analysis.

My big question is: if the Tea Party sweeps the boards in November and siezes the balance of power, will that be the point when smart international investors finally realize a ‘high tax’ exit strategy for solving the 350%+ Debt/Revenue ratio of the US, is a political dodo.

And will that be the trigger for the implosion of the deeply-flawed, existing US financial system?

If so, then not a moment too soon. Bring on the wailing and the gnashing of teeth. The pain must be faced. This is an economic system which deserves to fall.

Bring on the voters – each vote a flickering flame. And let them set afire the financial edifice enabling systemic theft of their future. A fairer system may arise from the ashes.

If a fairer one doesn’t, we’ll burn that down too.