Crumbling Under Debt

[Toro]

If America had a huge problem, you would see it in the bond market.

The yellow line are US 10 government bond yields, white is Germany, orange is Japan and green is the UK.

Now interest rates go up and down for lots of reasons, and differentials in interest rates occur for several reasons, but if America was truly on the verge of something bad happening, then the spreads between American debt and the debt of other countries wouldn't be as narrow as it has been. That doesn't mean something bad can't happen in the future, but in all due respect, if people on a bulletin board are identifying a potential problem, I can gaurantee you that the bond traders who set interest rates also certainly know.

And they do.

BTW, interest rates are going to continue to rise.

 

[BitWhys]

I'd have to double check about Manitoba's stake in its Hydro corp. You could be right. No matter for now. I'll wait for the usual pre-election ruckus to get the latest.

You make rising interest rates sound like a good thing all the time. Maybe in Japan, but there are some who argue interest rates is what REALLY set off bursting of the "tech bubble". See that spike at 2000? Timing is everything.

 

[fuzzylogix]

Re: RE: Crumbling Under Debt

An uncontrolled economy is like a pit bull in a daycare.

This is not an empty post- that is a great analogy, DB.
On an individual basis, many households run at huge debts- most people spend what they earn, and save very little, they buy bigger houses and cars than they can afford,etc .....
That all works until the unforeseen crisis hits....that unexpected expense... an illness, an accident, job loss, and then suddenly the household is bankrupt.

The same is occurring in the US. One day there will be the straw that breaks the camel's back. It is speculated that this might be a major earthquake in Japan. The reason being, that at that time Japan would have to recall its loans to the US, and that would be the sudden dramatic tip of events that had not been planned for.

It is interesting that on other posts here, Chomsky was regarded as being a pig for hoarding his money-- for not spending it and for saving it for his kids!! Here is someone, who has said, Hey- Im not going to live beyond my means, Im not going to expect the rest of the country to support me and my family- Im going to plan ----and he gets criticized for it!

 

[BitWhys]

couldn't help myself...

Canadian Tax Federation (pdf)

Manitoba
Manitoba’s gross debt on March 31, 2004 totalled $19.5 billion, of which $13.1 billion (67.2 percent) was payable in Canadian dollars and the remainder in US dollars. The Manitoba Hydro-Electric Board accounted for $6.6 billion. Manitoba had contingent liabilities of $950.1 million on March 31, 2004, which included $914.5 million in guaranteed debt for the Manitoba Hydro-Electric Board.

 

[Finder]

Well to keep the world econmy going both China and the USA's econmies need to be healthy. If either falls I fear that we'd go into a world wide depression, at very least a recession.

 

[#juan]

A little more on Canada's debt

link

 

[Toro]

couldn't help myself...

Canadian Tax Federation (pdf)

Manitoba
Manitoba’s gross debt on March 31, 2004 totalled $19.5 billion, of which $13.1 billion (67.2 percent) was payable in Canadian dollars and the remainder in US dollars. The Manitoba Hydro-Electric Board accounted for $6.6 billion. Manitoba had contingent liabilities of $950.1 million on March 31, 2004, which included $914.5 million in guaranteed debt for the Manitoba Hydro-Electric Board.

I wouldn't look at it like that though.

Most, if not all crown corporations are incorporated away from the government. They are separate operating units where the government commits money for share capital, then the rest of the capital structure is funded by debt and perhaps preferred stock to acquire assets. So, for example, if Manitoba wanted to build another damn, and the damn costs $100 million, the government might pony up $20 million and fund the remaining $80 million in the debt markets. On the government books, they would show an equity debit of $20 million for the $20 million in cash they've contributed to the project. On the balance sheet of the company, they'd show credits of $20 million in equity and $80 million in debt. Counting the $80 million against the accounts of the government would be like you buying stock in GE then calculating GE's pro-rata share of debt and counting it as your own.

I don't know, maybe I'm wrong though. I don't deal in government bonds. I'll go ask my fixed income guys. It shouldn't be that way but government doesn't follow GAAP accrual accounting like business does, so maybe that is how they account for it.

To me, it appears that what matters when looking at debt puttable back to the government of Manitoba is the contingent liability of $915 million (which may be what the government put up in lieu of equity) not the $6 billion. Maybe I'll follow up on the accounts later.

However, the net debt of Canada as a percentage of GDP is about 10% lower than the US. And, even when looking at gross liabilities, Canada is in better shape going forward than the United States.

 

[BitWhys]

I think Manitoba Hydro is kind of unique. its got its own act and everything. It IS a strange way of reporting it. * shrug *

 

[BitWhys]

yeah. The important point is that with some regional exceptions, Canada has it under control. Most of Manitoba's bottom line goes all the way back to the stagflation fout-up every government in the industrialized world pitched in to back in the 60s and 70s.

A long-time NDP member asked me one time (rhetorically) "what's wrong with debt". If I were on my game I would have told her the most important problem is that it weakens the tax dollar.

Our bretheren to the south are going to have to face the music sooner or later and I think there's a strong chance they won't get off as easy as the last time back when Clinton put on the brakes (if you want to call that "easy").

 

[Toro]

There's nothing wrong with debt. People wouldn't be able to buy houses without it. Corporations wouldn't be able to fund expansion without it. Governments wouldn't be able to counter economic cyclicality without it.

What matters is whether or not it can be paid back.

We should look at government debt two ways - debt used to fund capital projects and debt used to enhance income.

Debt used for capital projects is good if it adds value to the economy. This is investment. Such spending would include things like a new road or education. In theory, the debt used for such expenditures would lead to enhanced tax revenues for the government some time in the future. If such investment does not, then its bad investment. An example of bad investment would be paving roads just to pave roads or the Alaska bridge to nowhere. In financial theory, governments could always run debt for this type of investment if it is the optimal way of funding expenditure, as corporations do.

The second type of debt is that used to enhance income during times of economic downturns. But this debt should be paid off when the economy turns around. Over the business cycle, there would be no net deficit. Bush's tax cuts were a great idea when the economy turned down. It is a bad idea to not repeal those taxes now that the economy is strong (assuming government spending isn't cut). Such programs reduce the volatility in the economy and mitigate the boom-bust nature of the economy, which is a good thing,

Other government spending, such as the army, police, the operations of government, should be funded with taxes.

 

[Toro]

I think Manitoba Hydro is kind of unique. its got its own act and everything. It IS a strange way of reporting it. * shrug *

I see you got your information from The Canadian Taxpayers Federation. Now, I usually agree with that group, and maybe they got their information straight from the government, I don't know. However, they are a lobby group with an agenda, so maybe they're spinning it a certain way to put their argument in a better light. I'd go reconcile the figures, but its Friday after work and I'm lazy.

 

[BitWhys]

It is a bad idea to not repeal those taxes now that the economy is strong (assuming government spending isn't cut).

That's the problem. The political will to cut back at the right time is rarely there since by the time the good times roll around the cash flow is commited.

Canada has lots of options right now. A rare one at that. I hope it doesn't go to waste.

 

[Toro]

Eventually, Americans will pull their collective heads out of their derriers. Even the tax-cuts-at-all-costs Repulicans.

 

[BitWhys]

...However, they are a lobby group with an agenda, so maybe they're spinning it a certain way to put their argument in a better light. I'd go reconcile the figures, but its Friday after work and I'm lazy.

heh

That's just the first thing I managed to drag up but I've seen that "but the Hydro balance..." sort of thing a few times. Manitoba's got its own way of doing its books. Its supposed to get straightened out. This year I think. Something to do with the Crown corporations. It makes for rather amusing press, though.

 

[Toro]

 

[Toro]

 

[#juan]

link

 

[darkbeaver]

Neat link Juan, that debt clock is really ticking over.

 

[#juan]

Hi darkbeaver

Did you notice that the U.S. debt always rises under the Republicans and falls under the Democrats? Makes one wonder why they would elect a republican.... :roll:

 

[Toro]

Hi darkbeaver

Did you notice that the U.S. debt always rises under the Republicans and falls under the Democrats? Makes one wonder why they would elect a republican.... :roll:

Juan, what is your definition of always?

You may not know this but Eisenhower and Nixon were Republicans. So that means 2 out of 4, or 50% of the time. In math, 50% doesn't mean "always".

And I believe absolute debt rose under Carter. This graph is debt/GDP.