Streetwise Professor

May 15, 2010

Further My Last: The IMF Calls BS on Alfred E. Krugman

Filed under: Economics,Financial crisis,Politics — The Professor @ 5:19 pm

This article from the Telegraph summarizes the dreary conclusions of an IMF report which says, contrary to Alfred E. Krugman, the United States faces one of the most daunting fiscal crunches in the years ahead.

Some key findings:

But the really interesting stuff is the detail, and what leaps out again and again is how much of a hill the US has to climb. Exhibit a is the fact that under the Obama administration’s current fiscal plans, the national debt in the US (on a gross basis) will climb to above 100pc of GDP by 2015 – a far steeper increase than almost any other country.

. . . .

But level of debt isn’t the only problem. Then there’s the fact that the US has a far shorter maturity of government debt than most other countries, meaning that even if it weren’t borrowing any extra cash it would have to issue a large chunk of new stuff each year as things are. The killer table to show you that is this one, which shows a country’s “gross financing needs” – in other words how much debt it has to issue in the coming years to keep itself functioning.

. . . .

But all of the above is what explains why the US, according to the IMF’s projections, has more to do than any other country in the developed world (apart from Japan) when it comes to bringing its debt back towards sustainable levels. Here’s the killer table. The column to look at is on the far right: note how the US needs a 12pc of GDP chunk chopped out of its structural deficit (ie adjusted for the economic cycle). That’s $1.7 trillion. Wow – that’s not far off Britain’s total annual economic output.

. . . .

However, the flip side of this is that because it has yet to feel the market strain, the US also has yet to face up properly to the public finance disaster that could befall it if it does not do anything about the problem. America is not Greece, but if it does not start making efforts to cut the deficit within a few years, it will head in that direction. The upshot wouldn’t be an IMF bail-out, but a collapse in the dollar and possible hyperinflation in the US, but it would be horrific all the same. America has time, but not forever.

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7 Comments »

  1. That is one of the things I agree with SWP on. I’ve been writing about US fiscal imbalances for more than a year now. American sovereign debt is becoming increasingly rent-a-bond, not buy-a-bond, and as soon as the herd clues on that US promises to close the budget deficit are not credible they will stampede out.

    Comment by Sublime Oblivion — May 15, 2010 @ 7:19 pm

  2. For you, SWP

    http://seekingalpha.com/article/205239-nassim-taleb-on-what-should-really-worry-us-about-the-flash-crash?

    Comment by elmer — May 16, 2010 @ 11:05 pm

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    Pingback by Tweets that mention Streetwise Professor » Further My Last: The IMF Calls BS on Alfred E. Krugman -- Topsy.com — May 17, 2010 @ 4:59 am

  4. Who holds these debts professor? I would think these same countries hold each other’s debts – private investors / general public via pension plans. Would be interesting to know how things stack up netted out…..

    Comment by Surya — May 17, 2010 @ 9:36 am

  5. S/O will they stampede out? Is there any other reliable alternative? You cant simply stack up on Gold…..Euro is worse, where else to go…

    Comment by Surya — May 17, 2010 @ 10:30 am

  6. S/O will they stampede out? Is there any other reliable alternative? You cant simply stack up on Gold…..Euro is worse, where else to go…

    You can stack up on commodities in general, which is one way of investing into China and the resource exporters – IMO, the best bets for the next decade.

    Comment by Sublime Oblivion — May 17, 2010 @ 7:36 pm

  7. Investing into China? I guess there is a bigger credit bubble going on out there. Commodities boom has been fueled by those who shouldnt have consumed too much in the first place anyways – when their bluff is called, commodities should go down as a consequence. So you see, dollar might be safe after all 🙂

    Comment by Surya — May 18, 2010 @ 4:00 am

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