“It is difficult to sustain a policy that relies too heavily on issuing debt. As we have seen with the financial confusion in the European community stemming from Greece, our finances could collapse if trust in national bonds is lost and growing national debt is left alone,” he said according to the AP.

His vision of the future is flawed.Japan is the second largest nation in the world as measured by GDP. It is also among the world’s five biggest exporters. While its national debt is dangerously large, the odds that it would default on its sovereign obligations are small, particularly because the country is likely to implement “Europe-like” austerity measures. Prime Minister Naoto Kan may simply be using his bully pulpit to push legislation to cut national spending through a Parliament which is unlikely to want to alienate voters.

One of the by-products of the Eurozone debt crisis is that political talk about economic stimulation has given way to rising pressure to cut spending. Even a relatively rich and stable Germany has announce plans for sharp decreases in national spending. Greece may not be a fair example of what the future will bring for Japan and Germany, but it is a convenient one.

The actions by Greece, Portugal, Spain, Germany, and now Japan will have two impacts. The first is that sovereign debt is likely to become more attractive as issues of default begin to disappear, at least beyond the Greek situation. This will bring money into sovereign paper which will reduce borrowing costs. The disaster in Greece may be the best thing to happen to national borrowing costs  since the Asian debt crisis of the late 1990s.

The other result of the move toward austerity is that it will bring pressure on the US Administration and Congress to admit what Ben Bernanke has told them is right. The national deficits and growing national debt are not sustainable and will threaten economic stability by the end of this decade. Even entitlements programs will need to be cut.

The ripples from Greece may be small in the US but they are detectable.

Douglas A. McIntyre

American businesses have been reluctant to hire which has kept total unemployment and under-employment over 17%. That has been, and will continue to be, a drag on GDP improvement and consumer spending. Congress continues to extend unemployment benefits, at the cost of tens of billions of dollars to taxpayers.

In the meantime, there is no way to offset the higher borrowing costs for US companies. There is also no way to offset the effects of the scarcity of capital.

Geithner, Summers, and other Administration officials have argued that the crisis in Europe is not likely to damage the US economy. That is not true. The effects have begun already and could be long and profound.

Douglas A. McIntyre

The trouble with the agreement is that it is no agreement at all. What the capital markets have to assess now is a promise that a structure to help Greece will be created. However, it will only be created if Greece needs one, and the government of the southern European nation has not be decisive in it comments about a need for capital. Over $50 billion of its sovereign debt is due between now and the end of the year. Greece’s debt is about 13% of GDP. Several economist say that there is no chance the nation can cut enough costs and raise enough tax revenue to avoid insolvency.

Greece has no credibility with the capital markets both because its estimates of its own financial position has been so badly off the mark and because labor unrest and strikes in the nation threatens to undermine tax revenue. One of the major reasons that EU nations have been leery about Greece is this instability.

That handshake between France and Germany is actually nearly meaningless. The IMF has not made it clear on what basis it would be involved in a Greek bailout or whether the Greek government would accept IMF conditions.

The EU summit has turned out to be nothing more for senior Greek government officials than a spring vacation.

Douglas A. McIntyre

The American government owes just shy of $3.5 trillion to foreign governments, corporations and individuals.  The lion’s share of this is owned to China and Japan, which own 22.8% and 21.5% of U.S. debt owed to foreign parties.  See who owns the rest after jump.

Posted in Investing Tagged: China, Debt, Economy, Japan, U.S. Debt ]]> http://247wallst.com/2010/01/13/which-countries-own-americas-debt/feed/ 0 ChinaDebtEconomyJapanU.S. Debt pkmac47 Money Image Who Owns America's Debt? http://247wallst.com/2009/11/10/banks-intend-to-buckle-down-in-the-face-of-credit-card-legislation/ http://247wallst.com/2009/11/10/banks-intend-to-buckle-down-in-the-face-of-credit-card-legislation/#comments Tue, 10 Nov 2009 13:22:57 +0000 Douglas A. McIntyre http://247wallst.com/?p=52933 In the FED’s most recent bank survey they asked how the banks indented to deal with the Credit CARD Act of 2009.  The Act meant to protect users from sudden interest rate spikes on their credit cards.  Its main provisions limit when lenders can raise rates on existing balances and also require lenders to alert card holders of increases.  

Of the banks surveyed, 75% of respondents did not expect to be in compliance with the legislation until February 2010 when most of the Act takes effect.  Banks reported that they intended to, or already have, tighten the terms of credit card loans to both prime and nonprime borrowers.  About half of the respondents indicated that they would increase interest rates and reduce credit limits for prime borrowers.  A bit less than half intend to raise the minimum credit score required to obtain a loan.  75% of respondents indicated that they would raise rates on nonprime borrowers.  

Since the FED survey deals only in general with the policy decisions of credit card issuers it remains to be seen what the net benefit of the Credit Card ACT of 2009 will be for consumers.  What is certain is that consumers have come to rely on credit cards less and less since the summer of 2008.  To some degree this has been the result of self-restraint.  Consumers have recognized their need to debt reduction and have acted accordingly.  Tightening on the part of lenders, both in the face of government legislation and in the name of prudence, has also been a factor.  The chart below show the year over year growth rate of consumer credit, and its revolving and nonrevolving components.

Year Over Year Consumer Credit Growth Rate, September 2006 through September 2009

Prior to the credit crisis the largest year over year decline in consumer credit since 1975 was in November of 1991 when consumer credit declined 1.89%.  That record was first broken in May of this year, and the decline reached 4.75% in September.  At the onset the credit crisis revolving credit, which is primarily credit card loans, continued to grow while non-revolving credit had started its decline.  Since late 2008 credit card loans have been in a nosedive, so that on a net basis consumers are repaying their debt.  It is likiley that the banks reaction to credit card legislation will only accelerate this trend, further reducing consumers’ ability to rely on credit in the absence of income.  

Garrett W. McIntyre