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The four measure economies
The four measure economies of the world those, as a rule, controlled the international economic activities are on the verge of collapse. Martin Hutchinson an economic observer from US, discusses it and I thought it will be a good piece of information and so put it now on the posting here. This reveals the danger through which these economies are passing and that may help us understand what we should do in the near future.
Let us see what he says, according to a recent Financial Times story, volume in the credit default swap market for rich countries has soared and so have credit spreads; while volume in emerging markets CDS has stagnated. In other words, traders are betting against the governments with high budget deficits, like Britain and the United States, as well as against those with high debt levels, like Japan and Italy.
The question is; is there really a substantial chance of a big rich-country default, and what would it look like if it happened? Let us visualize; which one of these four rich-countries will default first and what next?
Japan we take first, this nation has the highest debt but it goes to the citizens of Japan themselves and so there is less possibility of default.
Next, we take Italy; Italian Prime Minister, Silvio Berlusconi, is something of a scoundrel. However, unlike his counterparts in Japan, the United States and Great Britain, Berlusconi avoided the tendency for wasteful “stimulus” public spending when the recession was at its worst. Consequently, for as long as he is in power, Italy is unlikely to default. Unfortunately, though, Berlusconi is 73, and his opponents on the “centre-left” are far less responsible. That means they are prone to all kinds of economically damaging policies. Therefore, Italy is not out of the woods and may default if Silvio Berlusconi goes.
Next, we take Britain; Britain is in probably the worst shape of the Rich Four. It has the highest budget deficit – at an astounding 14.5% of GDP in 2009 – and very little chance of improvement.
Opposition leader David Cameron has pledged to bring that deficit down, but he is no Margaret Thatcher, to put it bluntly. In addition, it would probably take another Thatcher – or perhaps even an Attila the Hun – to chop away at Britain’s overgrown public sector, infested as it is with extra costs from the European Union.
Britain also has the problem that its primary industry – financial services – is currently the global economy’s Public Enemy Number One, and therefore seems unlikely to provide the tax revenue or support for London house prices that nation has come to expect. Yes, there are things Brits can do, but their wage costs will have to come down a long way before they can make money doing them. Meanwhile, default is quite likely, though it is probably not in the immediate future, since debt is still well below the levels currently borne by Japan or Italy. Any miscalculation and Britain could be the first to default.
The last contender is United States; the U.S. deficit for calendar year 2009 projected to be 11.9% of GDP. However, it looks likely that the U.S. deficit will be even slightly larger in 2010. In addition, the healthcare bill wending its way through Congress is likely to add nearly $200 billion a year to the deficit – starting in 2014 – when its full provisions smash. Less said the better about unexpected expenses on Afghan-Pakistan issue! One estimate is that about one trillion dollar likely spent on that and that expects to set off tumultuous upheavals in their economy. Unemployment continues to push. On the other hand, U.S. debt should still be around 100% of GDP even in 2014, thus, if there were to be a U.S. default, it would be after that date. When the baby boomers are retired; but still getting sick, receiving social security and generally chewing up resources. Even though as usual, US congress will work up, and manipulate the figures in the bookkeeping to delay the inevitable. Default expected by all chance, in year 2015.
All calculation done, yet, the odds of an eventual default, by one of these four indebted countries, are high.
That is not good news, even if the defaulting country is not the United States. Bond markets have large exposures to all four countries, and each of them has a large number of multinationals. That means risk premiums worldwide will increase for practically everybody. That, in turn, will make debt financing very difficult to obtain and will probably induce the stock markets to crash again. In short, investors and consumers worldwide are most likely looking at yet another mega recession, though; the next one that we are warning about is not likely to come our way before 2015.
If the United States were to default, the outlook would be a grim one for those who live in U.S. As the country defaults on its debt, U.S. government will not be able to pay Social Security or Medicare – at a time when the programs are already in deficit mode, paying out more in benefits than they are taking in.
Hence, either payment to the baby boomers will stop, with a sharp jolt or the U.S. Federal Reserve will per force print money in order to make Social Security and Medicare payments. That will result in very nasty inflation. Moreover, the country will not dodge a recession either, since U.S. companies will find it difficult to raise money, the same problem U.S. firms had this year. In addition to this one, more dilemma expected to show its horrible face and that will be, the demand by some countries for structural adjustment of Dollar! As a result, Dollar may be devalued rashly.
The only solution to this nasty situation is to bring in some fiscal discipline by introducing restriction on speculative activities in all markets. However, I would not bet the ranch on it.
Martin Hutchinson is very clear about the way economic turmoil is getting more complicated so much so that we see no easy way out. You may wonder why I write all these things in India while the trouble is mainly of western economics; my intent is to inform Indians in the U.S. that they better take the hint given recently by Manmohan Singh, to return to India. Before it is too late, be back, while the Dollar is still worth something! After 2015, there will be an exodus rushing out of U.S. and at that time, things may become difficult to handle, as we expect that U.S. government may bring in some ruthless conditions on Indians who want to return to India with their honestly earned fortune. I wish good luck to those Indian in U.S. and adieu.
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