Learning the art of defaulting!

Well, it’s almost rush hour time at the White House. That reminds me of Jackie Chan.

Yes, perhaps, the Obama team must be pursuing something-some kind of ‘fiscal miracle’ much acrobatically at the last hour. They don’t need stuntmen. They are ought to do the stunts by themselves. Something special, that would ensure that he keeps his last pledge. Just to make certain that the rest of the world worry less about the debt hangover III episode.

And keep faith in American economy, he says amongst all those “Rumble in the Whitehouse”.

That’s not a bad saying. After all, people tend to work hard under pressure, and ideas flourish better under stress, which I buy, ‘sometimes default pressure is a welcoming stimulus for a lame economy’.

However, in fear of losing sovereign credit status and to prove the credibility of the government in handling crisis, the crisis management team has swung in full action to avert an inevitable default. What better can they do? Work hard- it’s now or never!

It seems they are working really hard to counter all odds.

Indeed, it wouldn’t have gone so far if the Washington would have managed endogenous (domestic) deficits with prudency that has now bubbled into exogenous (external) debt. Well, the blame game goes on...

There is a lesson to be learned from this violent yet lurid episode. Be rational.

Yet, for all those countries that does not have sustainable fiscal policies and are in the act of merrymaking with their fiscal ascendancy, this is a perfect time to rethink about fiscal prudency. Else, they will need to perform stunts in future.

The pitfalls of conspicuously raising debt ceilings are evident as it laid the foundation stone for many a country toward defaulting on their sovereign debts. Consider Italy- the tenth largest in the world and fifth largest economy in the eurozone by output measured at $2.01 trillion(2010), has a debt ratio to GDP at 119%. The fact is, borrowing costs are increasing for Italy and a rise above 6% risks contagion. The cost of debt financing now stands at 5.67% for Italy. Even Germany is not spared and has debt-to-GDP ratio at 83%. For instance, just concerns about high debt induce a rise in borrowing costs similar as mouthwatering happens when we think of sausages (Pavlov was right about dogs!). Sausages are to cost more as investors are always fine-tuned to drive borrowing costs to unsustainable levels. Can’t blame them, it’s their money chick.

And when there are the Republicans up in arms against the Democrats, Italy is not far back. There is an ongoing tussle between Finance Minister Giulio Tremonti and Prime Minister Berlusconi. They don’t agree and love discordances. That's...what you call animal instinct. Can't blame, we all have this!

Italy has few options to avoid default, and some options not to. How? By selling more debt by issuing more bonds. Yes, that’s the tip. Italy issues largest amounts of bonds in the Eurozone. It is a cunning jackal in E.U. But that made Italy’s accumulated debt load surpass 119% of GDP. Tough job for the new IMF boss only if Italy defaults! Rating agencies are more cautious since the days of subprime blame game started, and they would not hesitate declaring a country as ‘selective default’ or cut ratings outright.

Nobody wants to take the blame.

It seems that they are into some competition of borrowing and selling debt. Being proud owner of debt is now a fad and fashion. But this fashion was more prevalent among the emerging markets a few decades ago. Yehee! Times have changed but they have not!

It seems now that the IMF boss Lagarde is following the legacy of Bernanke and President Obama by inheriting nothing at all!

An assessment of debt-burdened euro area reveals more crowning jewels. This growing turmoil in the financial markets is leading to head spinoff spooky dog trails, making one country a bedfellow to another. What a theatrical performance!

Greece has three potential and active lenders, the IMF, ECB and the EC. But these institutions are having many borrowers queuing up for alms. And the IMF and the ECB are out to reducing burdens on Greece by cutting their interest rates and extending loan maturities as well, helping buyback their bonds above all, with two tranches of bailout packages. It’s urgent that ECB should look into governance reforms in the eurozone area.

But money doesn’t grow in plants. They grow by practice of hard labor and productivity. These lenders ought to think about financing bailouts that is growing by the day, and emerging by night. And that’s about economic growth. But eurozone countries are not growing and that’s troubling for these lenders of last resort.

Germany has well learned the lesson when it tasted recession at the very beginning of this millennium (2003) at the same time, when the world started to walk into the path of bubbly stardom. However, Germany revived their economy, and now being on a remarkably high growth territory, has become neighbor’s envy but owner’s (Merkel’s) pride.

Endless bouts of austerity may lead to stagnant growth and expanding bailout funds is putting pressure on the euro currency. And following all this, they then have another job to perform- resuscitating the capital market reputation of sovereign defaulters.

So, Obama team must be at something between the two ends of a hotdog- which is better, defaulting on the external debt or tighter macroeconomic measures?

And who knows and cares about some “other hidden debts” of the government?

The real fact is, every button has a hole. The question is, how big it is?

Source: IHT

It's Time to Turn Around...thinking about 8.5% Growth?

Sweet memories don't fade faster than the bitter ones.

The question is, whether to default or not to default?
And the answer is, nep.

Can’t blame the Obama administration either can we? They almost inherited a battered, shattered economy with burning issues left for fiscal fantasies. But it seems that they have forgotten J.M. Keynes! Attempting conspicuously to raise the debt ceiling is neither is a good option nor the only fair policy choice. The fiscal fissures left behind by the Republicans bore fruit as their business of corporate bailouts turned out to be lender of last resort’s (Fed Reserve’s) nightmare. Now left with but few policy choices, their primary objective is to deal anyhow and in anyway to avert a default on sovereign debt. Any sweeping budget agreement to reduce deficits by overhauling tax base seems improbable, given that Republicans are up in arms against such initiatives.

But it’s not the Republicans who are to be blamed. They are as patriotic as the Democrats. They all work for a better future, for a better tommorrow. They did what was required, only did they ever undermine the overstimulation of the economy that led to over-borrowing.

However again, Keynes may have some answer. Even if a tax re-write to generate new revenues and channelize those into productive economic growth would in certain, expand the tax-base and create new jobs, raising new money in the old economy seems to be the real problem for the Democrats. What America needs is quality spending since; spending must have some utility or social value.

Although Bush era tax breaks to affluent is to end by 2012, it would be too late altogether for the Democrats. And, how long do you think holding down interest rates to allow cheap borrowing may pursue such goals? Any default on debt will invariably raise borrowing costs (that’s the cost of a default) and that would require to be cushioned through quantitative easing policies.

But this time, the Fed should try a new aspect-qualitative easing against quantitative easing.
Fed Chairman, Dr. Bernanke would be in much more demand in those times again. Can’t blame him either can we? Like Obama, he inherited the Chairmanship of the Fed Reserve following the legacy of Greenspan. And it all started with him soon after. Suppose that the US defaults on domestic and sovereign debts that would invariably cast shadow on the attractiveness of the long-term US Treasury debt papers. For a few years, the 33 Liberty street near the Fed Bank would be deserted almost.

Well, that would cut Mr. Bernanke’s frustration and he can rather buy some quality time. But that’s not a good way out. Macroeconomic structural imbalances should be solved and vigorous stimulation of the domestic economy would be required. In those atmosphere, it may turn out that, to surprise, USA may be growing at a rate of 8.5% again!! That happened during the 1980’s. That can happen now. Americans have a fair history of turnarounds similar to Japan, and this is their last chance perhaps.

Suppose that, if growth returns with full vigor in the USA, bad days for China and their heap of cheap stuffs. But before that happens, and by default, Beijing-Washington debt standoff may be the real factor of gunship diplomacy.

And in those days, it may well sound like the tale of two economies with two currencies- a rising dollar, and a falling renminbi. And that wouldn’t matter much! Even a wildly depreciating renminbi wouldn’t be enough to attract Chinese goods into the US shore.

A contrarian view isn’t it? Well so, what options do really remain for the Democrats?

1. First, extending maturities on bonds set to expire (seems unlikely, but probable)
2. To avoid being marked as a defaulter and lose credit status, privatization as a long-term remedy for the economy (few takers)
3. Package for austerity measures similar to Greece (people would be on the streets)
4. Involve the private sector through large scale private-public partnerships for growth oriented policies and large-scale investments in railways, highways etc. (to create jobs)- (not seemingly a better idea for the Republicans)
5. Selling and issuing more debt (raising debt ceiling-not just only one option)
6. Let China buy more Treasury bonds (not a bad choice-but may lose some fiscal sovereignty this time)
7. New tax levies on banks and investment houses
8. Re-in sourcing jobs by reinsuring new employment
9. Filling tax-loopholes would invariably fill-up fiscal fissures
10. Reorganize defense spending, enough has been done, and off certain, quite important for the long run,
11. Don’t mess-up with the Medicaid.
12. Renegotiate international trade treaties and let the closed economies open up a bit further
13. Don’t just hope for the best; rather toil firm for the best!
14. And don’t let Fed buy up all the treasury debts again
15. Invest in R&D, education, reignite American Dreams*
*(Most important)

These measures would in time, invariably alleviate the long-term deficit problem of the US. Mamas will sing and dance with Billy Joel’s River of Dreams, not to wake up at night and fear about tomorrow. And here again, Keynes is the king, as those were so fair times!


Sources: IHT.

Our Version of a "Good, Bad and Ugly Economy"!

The question is, whether to default or not to?

How would a layman rate the present American economy? Well, it may be the job for the rating agencies-Moody, Fitch and Standard and Poor, as they are marinating for a busy schedule for the judgment day- August 2^nd. For us, it is between “Good, Bad and the Ugly”. A good economy supports lending. A bad economy does not, while the ugliest of all- defaults.

The doomsday clock is ticking faster than it seems. Prioritizing a compromising solution as a last ditch to avert a default seems to be the utmost bread and butter job for the US policy makers these days. Like the ratings’ agencies, they have a busy schedule till 2^nd of August. The next day would belong to rating agencies. What started out as fiscal hedonism has turned out to be a pauper’s austerity? Let’s see.

Financing bailout programs now have almost become 'vogue and vanity' since, behind the wax-lyrical tunes of recovery following every major recession, belies the debilitating melody of writedowns and bailout packages regenerating acute market anxieties. Following the Subprime crisis, the Fed Reserve bailed out the private sector. Now, who would bailout the US government? So, one may hang around one’s own mind and ask, what is making the economies so vulnerable to default? Are these the consequences of policy-breakdowns or outcomes of modern fashionable hedonistic fiscal practices that predisposed those same economies to adopt austerity measures at present?

For the creditors, it’s a matter of “faith”-China and particularly Japan. A default would cost at most about $4.5 trillion of creditors wealth, substantially those of China, Japan and the UK. The days of gunboat diplomacy would invariably end for China, who often mounted threatening calls for a sell-out of their enormous fed treasury holdings-but yet, that’s nevertheless hard earned currency from cheap manufacturing exports. Japan, perhaps, may have the worst pie, had run through one of the worst stagflation for decades, has been through a devastating Tsunami, and well, may loose after everything else, their proud investments in Fed-treasury. That amounts to $900bn, or about 1/5^th of Japan’s yearly output.

So, the question hovers, can Obama administration afford to default? And if they do, what would be the market reactions? Who will win or loose the largest part? This P&L accounting now seems to be both annoyance and anxiety among the investor community globally, since; the attractiveness of the US treasury bills fascinated many a countries to shelve their surplus forex reserves, as a safe haven. The US Treasury bonds are considered most liquid product in the world after hard currency, and they could have never imagined that there would be such a version of liquidity crisis in the US that would dent their faith in it. But it happened.

Again, it’s a matter of confidence and trust-the other import of faith. These countries, not only exported their goods and liquidity (as trade and current account surpluses), but together, their faith through their investments. For the US, suppose that even if they default, the equation won’t change much. It is neither Greece nor Portugal. Being an Ivy-league economy, at most, it may loose credit status temporarily and that too, people will forget after a decade or so. But the Obama administration cannot alienate the vote bank by rolling back Medicaid. Or neither the note bank-the corporate sector-by increasing tax rates.

And if they doesn’t estrange these two, the only option is to alienate the international creditors-ahoy, China! Think like killing two mocking birds with a single stone. Well, not a bad option is it? At least, they don’t have to worry about repaying Chinese debt.

So, the reason, it may become an Ugly economy-By Default.

And suppose that if there was any political motive behind buying U.S. T-debt by China, that would, again ahoy-will be nullified. But that might invoke “gunboat diplomacy”. But first in place, why did China buy so much of US Treasury debt? They found no other better place to invest and channelize their surpluses. And then, perhaps for a better U.S.-Chinese debt symbiosis that may have shaped artificially low interest rate scenario which first led to housing price bubble, and then let it burst. Now, the whole episode turned out to be some borrower’s paradise, and lender’s nightmare. So suppose that the P&L accounting goes wrong for China, what’s their option?

Think before you invest. Think again. And this usually follows every nation that goes bust. And for every creditor who lose by lending.

China can however recuperate and absolve some of the losses by heavily boosting domestic consumption, while, the US, may have indeed very little option but to stimulate and opt for more savings in future, and enforce fiscal prudence in managing deficits and debts. Well, the most lasting and hidden acumen is perhaps, after a short debt-overhang, US may be back in old business, but who knows what lingers for China? Where will they start investing their new sovereign wealth? India may be a good bet next time. And for Japan, perhaps, they won’t be able to afford to lose so much next time!

Well, this is the layman version of a Good, Bad and Ugly economy.

Ref: IHT, Bloomberg.