US debt shot up $238 billion to reach 100 percent of gross domestic project after the government’s debt ceiling was lifted, Treasury figures showed Wednesday.
Treasury borrowing jumped Tuesday, the data showed, immediately after President Barack Obama signed into law an increase in the debt ceiling as the country’s spending commitments reached a breaking point and it threatened to default on its debt.
The new borrowing took total public debt to $14.58 trillion, over end-2010 GDP of $14.53 trillion, and putting it in a league with highly indebted countries like Italy and Belgium.
Public debt subject to the official debt limit — a slightly tighter definition — was $14.53 trillion as of the end of Tuesday, rising from the previous official cap of $14.29 trillion a day earlier.
Treasury had used extraordinary measures to hold under the $14.29 trillion cap since reaching it on May 16, while politicians battled over it and over addressing the country’s bloating deficit.
The official limit was hiked $400 billion on Tuesday and will be increased in stages over the next 18 months.
The last time US debt topped the size of its annual economy was in 1947 just after World War II. By 1981 it had fallen to 32.5 percent.
Ratings agencies have warned the country to reduce its debt-to-GDP ratio quickly or facing losing its coveted AAA debt rating.
Moody’s said Tuesday that the government needed to stabilize the ratio at 73 percent by 2015 “to ensure that the long-run fiscal trajectory remains compatible with a AAA rating.”
As a quiet example of how privatizing Social Security works in the real world, Chile’s 30-year experiment is succeeding beyond expectations. Instead of running huge deficits to fund the old “PayGo” system, private savings now exceed50 percent of the country’s Gross Domestic Product.
Prior to May 1, 1981, the Chilean system required contributions from workers and was clearly in grave financial trouble. Instead of nibbling around the edges to shore up the program for another few years, José Piñera, Secretary of Labor and Pensions under Augusto Pinochet, decided to do a major overhaul of the system:
We knew that cosmetic changes — increasing the retirement age, increasing taxes — would not be enough. We understood that the pay-as-you-go system had a fundamental flaw, one rooted in a false conception of how human beings behave. That flaw was lack of a link between what people put into their pension program and what they take out….
So we decided to go in the other direction, to link benefits to contributions. The money that a worker pays into the system goes into an account that is owned by the worker.
The system still required contributions of 10 percent of salary, but the money was deposited in any one of an array of private investment companies. Upon retirement, the worker had a number of options, including purchasing an annuity for life. Along the way he could track the performance of his account, and increase his contribution (up to 20 percent) if he wanted to retire earlier, or increase his payout at retirement.
How well has the system performed? John Tierney, a writer for the New York Times, went to visit Pablo Serra, a former classmate and friend in Santiago a few years ago, and they compared notes on how well their respective retirement programs were doing. Tierney brought along his latest statement from Social Security, while his friend brought up his retirement plan on his computer. It turned out that they both had been contributing about the same amount of money, so the comparison was apt, and startling, said Tierney:
Pablo could retire in 10 years, at age 62, with an annual pension of $55,000. That would be more than triple the $18,000 I can expect from Social Security at that age. OR
Pablo could retire at age 65 with an annual pension of $70,000. That would almost triple the $25,000 pension promised [to me] by Social Security starting a year later, at age 66. OR
Pablo could retire at age 65 with an annual pension of $53,000 and [in addition receive] a one-time cash payment of $223,000.
Tierney wrote that Pablo said “I’m very happy with my account.” Tierney suggested that, upon retirement, Pablo could not only retire nicely, but be able to buy himself a vacation home at the shore or in the country. Pablo laughed it off, and Tierney wrote: “I’m trying to look on the bright side. Maybe my Social Security check will cover the airfare to visit him.”
According to Investors Business Daily, the average annual rate of return for Chilean workers over the last 30 years has exceeded 9% annually, after inflation, whereas “U. S. Social Security pays a 1% to 2% (theoretical) rate of return, and even less for new workers.”
As expected, the capital accumulated in these privatized accounts have generated substantial growth in Chile’s economy. As noted by Wikipedia, “Chile is one of South America’s most stable and prosperous nations, leading Latin American nations in human development, competitiveness, income per capita, globalization, economic freedom, and low perception of corruption.” [Emphases added.]
High domestic savings and investment rates helped propel Chile’s economy to average growth rates of 8% during the 1990s. The privatized national pension plan (AFP) has encouraged domestic investment and contributed to an estimated total domestic savings rate of approximately 21% of GDP.
This was anticipated by Piñera when the plan was originally designed and implemented in 1981. In reviewing the success of the plan after just 15 years, Piñera said, “The Chilean worker is an owner, a capitalist. There is no more powerful way to stabilize a free-market economy and to get the support of the workers than to link them directly to the benefits of the market system. When Chile grows at 7 percent or when the stock market doubles … Chilean workers benefit directly, not only through high wages, not only through more employment, but through additional capital in their individual pension accounts.”
All of which should resonate with American workers who have been forced to contribute to a failing Social Security system for years. And yet when given the opportunity to support any sort of privatization, as during the Clinton and Bush administrations, the idea gained little traction. And now that Rep. Paul Ryan’s “Road Map” offers the chance for those same workers to contribute just one-third of their Social Security taxes to similar private accounts, the idea continues to fall on deaf ears.
However, according to Rasmussen Reports, that may be changing. Nearly half of those polled now correctly understand ‘that making major long-term cuts in government spending will require big changes” in Social Security, Medicare, and defense. That figure, adds Rasmussen, “suggests a growing awareness of budgetary realities among the American people.”
To privatize Social Security makes nothing but sense, as in dollars and cents. The ownership of private property has always propelled economic prosperity, higher wages and improved standards of living. Only those whose goals are to impoverish the American worker and reduce his ability to manage his own affairs and control his own future would resist such an attractive alternative. As noted by Piñera,
This is a brief story of a dream that has come true. The ultimate lesson is that the only revolutions that are successful are those that trust the individual, and the wonders that individuals can do when they are free.
Thousands of Greeks arrive at the Parliament’s building to press their representatives to reject the new austerity package.
Reuters
June 28, 2011
Anti-austerity protests turned violent in Athens on Tuesday as the European Union warned Greek lawmakers the country faces immediate default unless they back an unpopular economic plan this week.
Hooded youths throwing stones and wielding sticks set fire to garbage bins and a telecoms truck outside parliament and riot police fired teargas to disperse them. Trade unions began a 48-hour strike against the EU/IMF-imposed measures.
Progress was meanwhile reported in talks to persuade European banks and insurers to voluntarily roll over maturing Greek debt under a planned second rescue package designed to give the euro zone country a breathing space.
Growing market confidence that the Greek parliament will approve the austerity program and that a French plan to roll over Greek sovereign bonds will help avert a default lifted global stocks and the euro despite the mayhem in Athens.
The EU’s top economic official, Olli Rehn, stressed that any further assistance for the debt-crippled nation hinged on parliament adopting a raft of spending cuts, tax rises and privatizations in crucial votes on Wednesday and Thursday.
“The only way to avoid immediate default is for parliament to endorse the revised economic program … They must be approved if the next tranche of financial assistance is to be released,” he said in a statement.
“To those who speculate about other options, let me say this clearly: there is no Plan B to avoid default,” Rehn said, dismissing widespread reports that Brussels was working on a fallback plan to keep Greece afloat.
The blunt alternative was underscored by Bank of England Governor Mervyn King, who told British parliamentarians that policymakers were working on ways to limit the damage from a potential default on Greece’s 340 billion euro debt pile.
“What we’re doing is to say there is sufficient concern in the market about the possibility of default for us to think about contingency plans and the consequences of this event,” King said.
He urged greater transparency about sovereign exposures to prevent a sudden, broad-based loss of confidence in European banks in the event of a Greek default, which could trigger a new credit crunch.
By nightfall, several hours of clashes involving hundreds of youths had subsided and central Athens had been reclaimed by thousands of peaceful protesters denouncing measures they say hit salaried workers and the unemployed while sparing the rich.
Some 5,000 police were drafted in, mostly to protect the colonnaded parliament building on Syntagma Square, focal point of weeks of mass demonstrations, some modeled on the encampment of unemployed Spanish “indignados” in Madrid.
ROLLOVER PROGRESS
The EU and IMF have said Greece must enact both the five-year austerity plan, with 28.6 billion euros in savings, and key implementing laws for structural reforms and state asset sales to secure the next 12 billion euro slice of aid in July.
Without that, Athens would run out of money within weeks unless it received some outside lifeline.
Risk premia on lower-rated euro zone government debt fell on news that German banks had agreed in principle to use a French proposal as a basis for negotiating private-sector participation in a Greek debt rollover.
The euro also hit a session high against the dollar, with fears of a Greek default offset by signs that European authorities and banks are making progress on a debt rollover.
Prime Minister George Papandreou’s Socialists hold a narrow majority with 155 seats in the 300-member legislature, but a handful of lawmakers have defected and others are threatening to vote against some or all of the measures, putting the outcome in doubt.
One possible scenario that could cause trouble would be if parliament approved the five-year austerity plan but voted down some of the implementing bills, for example on privatizations.
Conservative opposition leader Antonis Samaras underlined his opposition to the economic plan despite massive pressure from fellow center-right European leaders to back it.
“This policy is wrong, it has exhausted the Greek people and Greek society,” he told parliament. “If we perpetuate this mistaken policy we will only make things worse, both for Greece and for Europe.”
If Greece approves the legislation, euro zone finance ministers meeting in Brussels on Sunday are likely to agree to release the next aid tranche, with the IMF following on July 5.
Attention will then switch to putting together a second rescue package for Greece of about the same magnitude as the initial 110 billion euro bailout agreed last year.
The new program would involve some 30 billion euros in private sector participation via a “voluntary” rollover of maturing debt, a similar sum from privatization revenues and an expected 55 billion euros in new official funding.
Euro zone banks and insurers are considering a French plan outlined by President Nicolas Sarkozy on Monday under which private bondholders would reinvest half of the proceeds of maturing Greek debt in new 30-year bonds paying 5.5 percent interest plus a bonus linked to Greece’s GDP growth rate.
Of the other half, 30 percent would be cashed out and 20 percent would be invested in zero-coupon AAA securities with deferred interest that might be issued or guaranteed by the euro zone rescue fund, officials and banking sources said.
French banks have the largest foreign private sector exposure to Greece, followed by Germany.
Two sources close to the negotiations told Reuters that German banks had agreed to use the “French model” as a basis for talks with the German Finance Ministry on Thursday. German Deputy Finance Minister Joerg Asmussen also called the French plan a good basis for discussions.
Credit ratings agencies withheld comment pending details of the scheme.
Standard & Poor’s said on Monday it was too soon to judge the ratings impact of the private debt rollover being put together for Greece, which it had not yet seen, but did not rule out avoiding a downgrade to default.
Asked if he could imagine a solution in which private creditors voluntarily contributed to a Greek rescue package without triggering an S&P downgrade, Moritz Kraemer, head of European sovereign ratings, told Austrian television:
“It is conceivable depending on the situation. That is why I say it is not possible at all to draw a final conclusion on this in the current situation.”
In Berlin, visiting Chinese Prime Minister Wen Jiabao said Beijing had faith in the European economy and the euro and was optimistic that Europe could overcome its temporary challenge.
As in the past, he gave a vague commitment to buying euro zone debt without specifying countries or amounts.
The world is going to become richer and richer as developing economies play catch up over the coming years, according to Willem Buiter, chief economist at Citigroup.
“We expect strong growth in the world economy until 2050, with average real GDP growth rates of 4.6 percent per annum until 2030 and 3.8 percent per annum between 2030 and 2050,” Buiter wrote in a market research.
“As a result, world GDP should rise in real PPP-adjusted terms from $72 trillion in 2010 to $380 trillion dollars in 2050,” he wrote.
As the world watches oil prices rise sharply amid unrest in the Middle East, Buiter’s analysis of the world’s long-term prospects offer some hope that better times are ahead but if he is right power will shift from the West to the East very quickly.
“China should overtake the US to become the largest economy in the world by 2020, then be overtaken by India by 2050,” he predicted.
One Way Bet on Emerging Markets?
Growth will not be smooth, according to Buiter. “Expect booms and busts. Occasionally, there will be growth disasters, driven by poor policy, conflicts, or natural disasters. When it comes to that, don’t believe that ‘this time it’s different’.”
“Developing Asia and Africa will be the fastest growing regions, in our view, driven by population and income per capita growth, followed in terms of growth by the Middle East, Latin America, Central and Eastern Europe, the CIS, and finally the advanced nations of today,” he wrote.
“For poor countries with large young populations, growing fast should be easy: open up, create some form of market economy, invest in human and physical capital, don’t be unlucky and don’t blow it. Catch-up and convergence should do the rest,” Buiter added.
Buiter has constructed a “3G index” to measure economic progress; 3G stands for “Global Growth Generators” and is a weighted average of six growth drivers that the Citigroup economists consider important:
A measure of domestic saving/ investment
A measure of demographic prospects
A measure of health
A measure of education
A measure of the quality of institutions and policies
A measure of trade openness
Using that index the nations to watch over the coming years are Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, the Philippines, Sri Lanka and Vietnam.
Spain is the first country to go belly up. China to pull off a Nathan Rothchild style ‘purchase’
Sidney Morning Herald
China is confident Spain will recover from its economic crisis and Beijing will buy Spanish public debt despite market fears of an Irish-style bailout, a top Chinese official said Monday.
The comments by Vice Premier Li Keqiang were made in an op-ed piece in Spain’s leading daily El Pais one day ahead of his arrival in Madrid for a three-day official visit, the start of a European tour that will also include Britain and Germany.
“Since China is a responsible investor country in the long-term on the European financial markets, and in particular in Spain, we have confidence in the Spanish financial market, which has been translated into the acquisition of its public debt, something we will continue to do in the future,” he said.
“China supports the measures adopted by Spain for its economic and financial readjustment, with the firm conviction that it will achieve a general economic recovery”, said Li, who is widely tipped to become China’s next premier.
Investors have shown deep concern over the annual deficit being racked up by the Spanish government and its heavy reliance on the bond markets, leading them to demand higher and higher returns.
An economic and financial rescue for Spain would be far bigger than anything seen to date in Europe: the size of its economy is twice that of Greece, Ireland and Portugal combined.
Spanish public debt rose to 57.7 percent of GDP at the end of September from 53.2 percent at the end of 2009.
Chinese state media on Monday also quoted Beijing’s ambassador to Madrid as saying China is willing to make “positive efforts” to help Spain with its economic recovery.
Li’s meetings this week with Prime Minister Jose Luis Rodriguez Zapatero and Finance Minister Elena Salgado will “play a key role” in financial stabilisation, Xinhua news agency quoted the ambassador, Zhu Bangzao, as saying.
Their talks will focus on expanding trade and economic cooperation and will also help “restore market confidence,” Zhu said.
The Spanish economy, the EU’s fifth largest, slumped into recession during the second half of 2008 as the global financial meltdown compounded the collapse of the once-booming property market.
It emerged with tepid growth of just 0.1 percent in the first quarter of 2010 and 0.2 percent in the second, but then stalled with zero percent growth in the third.
