Posts Tagged ‘US government’

Question: how it is possible for real disposable incomes to fall by 5.3 per cent, yet personal consumption to rise by 3.2 per cent? (That’s on an annualised basis, by the way). It smells of debt, doesn’t it? Or consumers finding new confidence, or – dare one utter the words – of a bubble in the making. Yet this is what happened in the US during the first quarter of this year.

Here is another question. How is it possible, under the current economic conditions for government spending to be cut by 4.2 per cent in Q1 (again that’s annualised), while the economy expanded at an annualised rate of 2.5 per cent? Yet this is what has happened in the US.

It’s an odd thing. We keep hearing about how US government debt is unsustainable, and how Obama is leading the US economy over the steepest and most terrifying of fiscal cliffs.

The truth, if anything, is that the fiscal cliff is more like one of these things that count for hills in East Anglia. The US stares from the top of the dizzying heights of a molehill.

Capital Economics explained it thus: “The 7 per cent decline in real government expenditure over the past couple of years is very unusual. Expenditure did decline by 11 per cent in the 1950s after the Korean war ended, by 7 per cent in the early 1970s after the Vietnam war ended…Nevertheless, that makes the current decline already the joint second biggest since the end of World War II, with the sequestration cuts still to take effect.”

Republicans and Democrats are busily staring at each other like gun fighters at dawn, unwilling to even hint at compromise, which has meant the expiry of George Dubya’s tax credit, and forced budget cuts. Troop withdrawals from Iraq and Afghanistan have also helped to lead to a sharp fall in defence spending.

Even so, the figures are surprising. Capital Economics said: “After accounting for measures to raise revenue, such as allowing the payroll tax cut to expire, as well as spending cuts, the decline in the structural Federal budget deficit has been dramatic. From 7.0 per cent of GDP in fiscal year 2009, that deficit narrowed to 2.5 per cent in 2013 and, according to the CBO’s projections, will be only 1.0 per cent in 2014. By next year, most of the remaining Federal budget deficit will be explained by the lingering cyclical weakness.”

So the US is experiencing what we in Europe call austerity.

The large fall in disposable income was mainly down to expiry of the tax credit.

So why, oh why, or indeed how, oh how, did the US manage to grow at 2.5 per cent in the first quarter?

Answer: well it can surely be no coincidence that the quarter also saw the Dow Jones and S&P 500 hit new all-time highs. US house prices are on the mend too, and that did no harm.

It seems that Americans would rather see equity and house values rise, than earn more money – at least that is the story of Q1.

It is a triumph of QE. Quantitative easing, which is having the effect of pushing up on asset values.

Look at the global economy and it is hard to see why equities have performed so well this year. Look at QE, and the explanation becomes clearer.

Does this mean what they call monetary policy – that is to say central banks playing with interest rates and bond buying – can make up for the effects of austerity? The experience of the US in Q1 says it does.

But then again, it is just a quarter. This week alone may see data that tell another story. See: Data week in the US. In the battle between austerity/stimulus/monetary policy, snapshots are not very reliable.

The real cliff hanger in the story of the US economy relates to what effect austerity will have during the rest of this year.

© Investment & Business News 2013

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You don’t need to look far. The Internet is full of stories proclaiming doom. The US, they say, is on a one way street to financial ruin. Well it appears they are wrong. And if even if you could say that at a pinch there is a kind of one way street to debt hell, the street is very, very long, and it would not be hard to construct a diversion, and furthermore, we have plenty of time to do it.

Oh woe is us! Or is that woe is the US? And since the US will remain the most important advanced economy as far into the future as we can possibly predict, maybe the US and us is kind of the same thing.

At the end of 2011 US total liabilities were worth 741 per cent of GDP. Foreign holdings of US debt are currently worth around 60 per cent of US GDP – a big chunk of that is owned by China. The level is rising too. And then there is the so called elephant in the room – healthcare costs.

Estimates suggested that the net present value of unfunded US liability for US healthcare is $42.8 trillion, and $20.5 trillion for social security. Last November the ‘Wall Street Journal’ ran an article by Chris Cox and Bill Archer arguing that the true liabilities of the US government are nearer 500 per cent of GDP.

These are scary numbers. It is just that they are seriously misleading.

Take a look at any plan. It could be a business plan, a plan for funding retirement, a plan for a holiday or buying a house, or one for emigrating. And then ignore all the good news, all the promise. Quelle surprise the plan that is left does not look very attractive. Those who say the US is bust are applying similar logic.

According to Capital Economics, if you take into account the assets owned by the US, including equities, property, assets abroad, and indeed US infrastructure owned by the US government you are not left with net debt at all. In fact, the US has a net worth of around 550 per cent of GDP. Capital Economics calculates that the net worth of US households is 408 per cent of GDP, for non-financial businesses it is 118 per cent of GDP, for the financial sector it is 36 per cent of GDP, and minus 13 per cent of the US Government.

Bear in mind that this balance sheet applies at a moment that has succeeded a crash in US house prices. By historical standards US house prices look cheap.

Sure, the US has owns money abroad. But then again, the US also owns foreign assets. You can’t count US debt, but ignore money owed to the US. Take the full story into account, and net US foreign debt is about 30 per cent of GDP, less than a quarter of Greece’s external liabilities.

Besides, the US tends to enjoy much higher returns from the money owing to it, than it pays out on money owing abroad. This is largely because much of US debt held by foreigner is in the form of very low risk, low yielding government bonds.

Then there are heathcare and social security costs. In calculating the net current value of these costs, the doomsayers have looked at 75 year actuarial projections. As Capital Economics said, “Why stop at 75-year projections? Why not keep going for 100 years so the debt runs into the hundreds of trillions?”

In calculating the net current value of healthcare costs, the doomsayers have assumed costs will continue to grow at a much faster rate than GDP, and have built in assumptions about what the US economy will look like between 2040 and 2090.

Even if their assumptions are right – and it will be one very lucky guess if they are – the US has plenty of time to implement measures to address this, such as raising the retirement age, or upping taxes.

So here is the real shock. If the US carries on the way its critics predict, maybe at some point in the next 30 years it will have to see a rise in the retirement age and some kind of VAT.

Of course, there is something missing from all these guesses. Forget about the lone elephant in the room; there is a herd of mammoths, and it is technology. How anyone can start making sensible guesses as to what the US will look like in 60 years’ time, without taking into account the possible changes technology may bring is something of a puzzle.

©2013 Investment and Business News.

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