Skip to main content

Debt as Heroin

A shocking title, but I just read a fascinating analysis by Albert Edwards (from SocGen).  Edwards has been working on the sovereign debt problem.  Those investors who benefited the most from shorting Greece will remember his Q3/09 commentaries [around US Thanksgiving] where he mentioned that the PIGS were in immediate danger of defaulting on their debt obligations.  Earlier this week he wrote a more comprehensive analysis based in part on the work of Jagadeesh Gokhale (Senior Fellow at the Cato Institute – a rightwing think-tank…).

Edwards’ analysis is fascinating.  He makes a very interesting observation: those countries that suffer from the worse structural deficit – a government deficit even when the economy is operating at full steam, are behaving like heroine addics; they will promise anything as long as they can get their next fix!  Edwards takes the view that those same countries that have the largest gap are those who historically been the worse at managing their debt burden.  The guiltiest parties are the usual names plus a few surprises (Norway...):

Difference between required and actual primary surplus (% of GDP)




It gets worse, much worse, if “off balance sheet” obligations are included the operating surplus certain European countries need to generate are staggering.  

 


Taking France as an example, their structural deficit is around 1.75%, currently the French government is running a government deficit in the range of 8.2% (depending on a number of assumptions).  Because of France’s “unfunded liabilities” the total surplus it needs to generate is slightly north of 9%.  The difference is almost 12%, which is simply unmanageable, there is no way (politically or socially) for France to move to this type of surplus.  A solution will require not only a reduction services but also a dramatic reduction in benefits; retirement age will have to increase (e.g. truckers retire with full benefits when the turn 55).  Canada is in somewhat of different position.  In fact, it can run structural deficit because of the nature of its economy – natural resources exporter (Canada’s government also aggressively tackled its fiscal deficit in the mid 90s).  

The assumptions on which Gokhale makes his “unfunded liabilities” projections are fraught with risk (Generational Accounting) especially with regards to their magnitude. However, for the purpose of this analysis it is largely irrelevant because the gulf between where we are and where we need to be is so large that error factor is irrelevant.  In the case of France whether the structural surplus is 8% or 12%, doesn’t impact the overall message of social and economic dislocation.

It would appear that the European central bank and Germany are not buying the "addicts" line that after this one fix they will change their way.  This morning Angela Merckel indicated that there would be no German guarantee forthcoming for Greece.  

This should be interesting!

Comments

Post a Comment

Popular posts from this blog

Ok so I lied...a little (revised)

When we began looking at farming in 2013/14 as something we both wanted to do as a "second career" we invested time and money to understand what sector of farming was profitable.  A few things emerged, First, high-quality, source-proven, organic farm products consistently have much higher profit margins.  Secondly, transformation accounted for nearly 80% of total profits, and production and distribution accounted for 20% of profits: Farmers and retailers have low profit margins and the middle bits make all the money. A profitable farm operation needs to be involved in the transformation of its produce.  The low-hanging fruits: cheese and butter.  Milk, generates a profit margin of 5% to 8%, depending on milk quality.  Transformed into cheese and butter, and the profit margin rises to 40% (Taking into account all costs).  Second:  20% of a steer carcass is ground beef quality.  The price is low, because (a) a high percentage of the carcass, and (b)...
Post a Comment
Read more

Spray painting Taylor Swift G650 aircraft (updated)

 First, a bit of paint will not harm anyone.  These climate activities are going to learn two things in the next few days:  (1) Trespassing at an airport is a felony almost anywhere in the world.  That means criminal prosecution.   (2) removing paint from an aircraft is expensive.   So these climate activists are about to find out the reach of the British criminal system and it will not be pleasant, the UK has very strict laws about that, I would be surprised if cleaning the aircraft of all the paint will cost less than $100,000.     I am sure that when they planned (premeditation) this little show they had a very valid logic to doing this.  Tonight, they are probably realizing the depth of their troubles.   I understand that in the UK it's a minimum one-year jail sentence.    Also, good luck travelling with a criminal trespass charge against you.  I am relatively certain that the airline industry will ...
Post a Comment
Read more

Janet Yellen from China supporter to Hawk...

There is rarely serious news in the world these days, it seems that most newspapers are filled with headlines and little else, and then Ms Yellen went to China.  Secretary Yellen has long been known in the Biden administration as the voice of moderation when dealing with China, yet as her trip which concluded yesterday a hawk was born:  She warned the Chinese against dumping goods in the United States.    fighting words! The American administration is very concerned about the lack of Chinese domestic consumption.   Even before the COVID-19 epidemic, there were already the beginning signs of a slowdown, automobile sales were off.   China is facing domestic deflation (a clear sign of collapsing demand) China imports few consumer goods, they import raw materials and intermediary goods.   It seems that the American administration is concerned that the Chinese administration will dump consumer goods abroad to keep its manufacturing machinery ...
Post a Comment
Read more