7.27.10 - In fiscal crises in a number of countries around the world, investors have lost confidence in governments’ abilities to manage their budgets, and those governments have lost their ability to borrow at affordable rates
. With U.S. government debt already at a level that is high by historical standards, and the prospect that, under current policies, federal debt would continue to grow, it is possible that interest rates might rise gradually as investors’ confidence in the U.S. government’s finances declined, giving legislators sufficient time to make policy choices that could avert a crisis. It is also possible, however, that investors would lose confidence abruptly and interest rates on government debt would rise sharply, as evidenced by the experiences of other countries.
Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States. In a brief released today, CBO notes that there is no identifiable “tipping point” of debt relative to the nation’s output (gross domestic product, or GDP) that would indicate that such a crisis is likely or imminent. However, in the United States, the ratio of federal debt to GDP is climbing into unfamiliar territory—and all else being equal, the higher the debt, the greater the risk of such a crisis.
Over the past few years, U.S. government debt held by the public has grown rapidly. According to CBO’s projections, federal debt held by the public will stand at 62 percent of GDP at the end of fiscal year 2010, having risen from 36 percent at the end of fiscal year 2007, just before the recession began. In only one other period in U.S. history—during and shortly after World War II—has that figure exceeded 50 percent.
Further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades. Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels, as shown in the figure below. (For more details, see CBO’s recent report The Long-Term Budget Outlook.)
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# Posted by Joshua M Brown, July 27th, 2010 at 6:01 am
Burger chains are killing it, neighborhood diners are hurting. Oil & gas companies are raking it in, gas station operators are closing. Mass merchandisers have a new pep in their step, mom and pop retailers can't afford the lease anymore.
Get the picture?
This isn't a class warfare post, this is a reality check about the Recovery Apartheid*. Large businesses that are asset-rich are benefiting from our Sorcerer's Apprentice-like reflation policies (buckets and buckets sloshing over with corporate welfare). Anyone dependent on actual end-customer demand? Different story. Go ask a sole proprietor doing business on the main drag of your town.
Imagine if, instead of Earnings Season for the S&P 500, we had a 4 week stretch in which we heard from a different sector of Small Business each night on a series of conference calls. Imagine, if you will, that Monday night we heard from local restaurant and catering companies throughout the nation, then on Tuesday night we heard from auto dealerships, Wednesday night was machine repair shops, Thursday was real estate agencies, etc.
With my hypothetical Small Business Earnings Season in mind, I ask you the following...would the stock market have just posted an almost 4% gain since July 13th had that have been the case? Would anything said by a majority of America's business owners on conference calls each night even come close to matching the positivity on the Alcoa ($AA) and the Intel ($INTC) calls that kicked this earnings season off?
Probably not. Because away from the S&P 500, record-breaking cash hoards are not the norm for business owners, nor are trips to the Fed's discount window or financings done in a bond market voracious for yield of any kind.
Here's what the real "norm" is for small company owners these days - according to the latest NFIB Small Business Optimism survey, "the score of business owners who have reported higher nominal sales over the past three months fell by four points and now stands at a net negative 15 percent."
English translation - nobody's buying nothing.
Higher taxation and/or health care costs are an annoyance for a large cap, public company. They may limit profitability and even necessitate charges, but they do not represent an endgame. Health care hikes and additional taxation can be a death sentence for many smaller companies, however. Combine these obstacles with a lack of access to liquidity and capital markets and you have an almost perfectly segregated recovery, a literal Apartheid keeping giant swathes of the population on the outside of the rebound looking in.
The best-case going forward is that an improving picture for S&P 500 companies and other large entities leads to a dramatic boost and turnaround for the rest of the economy. The worst case is that the benefits of asset-price reflation and inventory restocking do not last much longer, and in hindsight, we find that the Recovery Apartheid was merely a temporary divide - that the big boys were just better at pretending they were recovering than their small company cousins.
We shall see.
*Author's note - Yes, I came up with the term "Recovery Apartheid" but you can totally use it because it is literally a perfect descriptive term for this business climate and it should one day appear in economics textbooks.
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