Tag Archives: debt

The State of the Union: The Path to Tyranny continues

An essay this weekend at Politico looks at the similarities between the fall of the Roman Republic and the United States today. I was asked by a friend to give my opinion.

The parallels between the fall of the Roman republic and our country are so numerous. Decline of virtue. Loosening morals. Redistribution of wealth. Multiplicity and mutability of laws. Ignorance and disdain for religion and the Constitution (way of the elders). Debt and monetary devaluation. Panem et circenses.

In The Path To Tyranny (2010), I wrote, “As of 2009, the federal debt held by the public was 55 percent of GDP,[1080] a large but manageable amount. The debt was just 41 percent at the end of 2008 and the 40-year average is 36 percent. The problem though lies in the future, not the present. By 2035, the debt is projected to be between 79 and 181 percent of GDP and, by 2080, it is predicted to be between 283 and 716 percent of GDP. The United States is clearly on the road to bankruptcy if the situation does not improve. Given that the deterioration intensifies just after 2020, we have just ten years to fix our government. Ten years may sound like a long time, but barring a real revolution, one with guns and violence, governments rarely change that quickly. It has taken the progressives and modern liberals a hundred years to produce our large government, but we have just one-tenth the time to reverse the trend. Not just stop new spending programs, but actually reduce the current commitments of the U.S. government.”

Unfortunately, we have kicked the can down the road for the last four years. If anything, the fiscal problems have gotten worse, not better, and the political situation has certainly gotten worse.

What scared me most, short term, is that this economic recovery officially started five years ago. As far as recoveries go, this one is a little long in the tooth. Some time, we will experience another recession. Deficits will go from the current $700-$800 million up to $2 trillion or so. Starting from such a weak economy to begin with, it this recession hits sooner rather than later, the lower and middle classes will be hit hard and will demand action from the government. It is in the throes of such economic despair and political incompetence that power accumulates in a single hand. I truly believe we are just one recession away from seeing a Caesar in our country. The apparatus is already in place (executive orders, non-enforcement of the law, NSA spying, etc.). One good crisis is all that is needed.

Fortunately, I don’t see anyone on the horizon with the charisma and skills to be this Caesar. Caesar was a great man, a great warrior, great politician, and great speaker. Obama is none of those, though some think he speaks well. If he had been competent, he could have done even more damage. God bless incompetence. Hillary Clinton is no Caesar either. Fortunately, I don’t see one, but then I am not predicting a potential rise of a new Caesar in the immediate future. It won’t happen until after the next recession has run a number of years. Think of the German economic misery of the 1920s that gave rise to Hitler. It takes many years before the people give up hope and give up their freedoms. As I wrote four years ago, I am looking for such an event to take place around 2020, if we don’t fix our problems, which so far we have only made worse.

UPDATE: Europe is paying for its past excesses: European interest payments as % of GDP.

With news out today of a weak German bond auction and troubles with the Dexia bailout, I thought it time to update my table of European interest payments as % of GDP. But first, the news:

  • Germany auctioned 6 billion euros of 10-year government bonds, but attracted just 3.889 billion euros of bids, a bid-to-cover ratio of just 0.65. Six of the last eight bond auctions have seen bids below supply. In these cases, the Bundesbank has bought the remaining debt. German yields are rising as a result. Germany’s 2-year yield is up 0.06% to 0.44% and 10-year yield is up 0.13% to 2.12%.
  • Belgian yields are soaring to new highs on reports that the bailout of Dexia was failing. Belgium’s two-year yield rose 0.69% to 4.98% and 10-year yield increased 0.40% to 5.47%. In France, also a partner to the Dexia bailout, the 2-year yield rose 0.14% to 1.86% and the 10-year yield jumped 0.15% to 3.68%.
  • No news other than the above is pushing up rates across most of Europe. Greece’s 1-year yield skyrocketed 38.6% to 306.7%. The 2-year rate jumped 4.6% to 117.9% and the 10-year year yield rose 0.18% to 29.04%. All are record highs. Over in Italy, 2-year yields rose 0.17% to 7.15% and 10-year yields increased 0.15% to 6.97%.

So now, let’s see an updated table of where Europe stands in its ability to pay the interest on its debts.

 

2-year interest rate

Debt-to-GDP

Interest payment %age of GDP

Change in Interest payment

Greece

117.88%

144.9%

170.8%

+14.4%

Portugal

14.62%

83.2%

12.2%

-3.1%

Italy

7.11%

118.1%

8.4%

-0.1%

Ireland

9.96%

64.8%

6.5%

+0.5%

Belgium

4.94%

96.6%

4.8%

+1.9%

Spain

5.82%

63.4%

3.7%

+0.8%

France

1.88%

83.5%

1.6%

+0.5%

Germany

0.45%

78.8%

0.4%

+0.1%

Great Britain

0.47%

62.6%

0.3%

———

United States

0.26%

99.7%

0.3%

———

As you can see on the above table, only Portugal had a significant decrease in interest payments going forward. In contrast, Greece, Ireland, Belgium, Spain, and France all say significant increases. Whereas previously, only four countries had interest going forward exceeding 3 percent of GDP, six nations now face that situation.

Clearly, as anybody watching the stock market decline here knows, the European debt crisis is getting worse and the European leaders have yet to find a solution. Unfortunately, with the budget mess in Washington and debt-to-GDP ratio of about 100%, higher than most of those “risky” European nations, the United States will soon be facing the same problem.

Europe is paying for its past excesses: European interest payments as % of GDP.

With interest rates rising in Europe and heavy debt-to-GDP ratios, I decided to look at how much interest each European country must pay going forward as a percentage of its economic output. I threw in the United States for fun. (Table sorted by interest payment %age of GDP.)

 

2-year interest rate

Debt-to-GDP

Interest payment %age of GDP

Greece

107.97%

144.9%

156.4%

Portugal

18.40%

83.2%

15.3%

Italy

7.20%

118.1%

8.5%

Ireland

9.16%

64.8%

5.9%

Belgium

3.00%

96.6%

2.9%

Spain

4.56%

63.4%

2.9%

France

1.33%

83.5%

1.1%

Great Britain

0.52%

62.6%

0.3%

Germany

0.35%

78.8%

0.3%

United States

0.23%

99.7%

0.2%

Now, these debt figures account only for federal government spending. Many countries, most notably the United States, also has state, provincial, and local governments with their own debts. Additionally, many of the debt-to-GDP estimates are from 2010. Thus, most of the above countries have debt-to-GDP ratios and interest expenses even worse than calculated above.

Clearly, we can see why Greece is in trouble. If it were to refinance its debt at market rates (it has been refinancing through Euro-zone subsidized loans), its interest payments would exceed its GDP by a half.

Italy is also paying for its problems. So far, Italy has received no help from any bailout fund and, as of now, will have to refinance its debt at market rates. As such, it will cost Italy 8.5% of its GDP to do so. If it had a more reasonable debt level and interest rates, say those of France, Italy would have an additional 7.4% of GDP to spend or save.

Most surprising is how everybody is ignoring Portugal. Portugal has already received bailout funds, but that won’t last forever. If Portugal were to return to normal by accessing the market, interest payments would eat up 15.3% of its GDP. That’s a lot to pay for past mistakes.

Belgium is another sleeper. It’s problems are just as bad as Spain’s, yet nobody is talking about them. Furthermore, Belgium has not been able to form a ruling coalition since elections were last held on June 13, 2010, breaking all records. Furthermore, the New Flemish Alliance party is Belgium’s largest political party with 17% of the vote. This party favors the “peaceful and gradual secession of Flanders from Belgium.” Lots of problems there, but nobody seems to be talking about it.

So far, Europe has paid for the mistakes of Greece, Portugal, and Ireland. However, Italy’s debt is 2.7 times the combined debt of those three nations that are already receiving bailout funds. That makes Italy both too big to fail and too big to bail out.

Europe is facing problems on multiple fronts: Greece, Italy, Portugal, Ireland, Belgium, and Spain, to name a few. So far, Europe has successfully staved off depression by bailing out the smaller, weaker countries. But as the problem spreads to more countries, and bigger ones at that, Europe is running out of room and options.

– Michael E. Newton is the author of the highly acclaimed The Path to Tyranny: A History of Free Society’s Descent into Tyranny. His newest book, Angry Mobs and Founding Fathers: The Fight for Control of the American Revolution, was released by Eleftheria Publishing in July.

Occupy Wall Street: A return to the chaos of ancient Greece and Rome

In Occupy Wall Street: The Return of Shays’ Rebellion, I wrote about how the Occupy Wall Street protesters, like the participants in Shays’ Rebellion, demand debt relief or forgiveness. But I must point out that this demand for debt relief predates the United States by at least a couple of thousand years.

The ancient Greek and ancient Roman historians and philosophers warned against debt relief and those who demand it.

About 2,300 years ago, Plato warned the ancient Greeks:

And is it not true that in like manner a leader of the people who, getting control of a docile mob, does not withhold his hand from the shedding of tribal blood, but by the customary unjust accusations brings a citizen into court and assassinates him, blotting out a human life, and with unhallowed tongue and lips that have tasted kindred blood, banishes and slays and hints at the abolition of debts and the partition of lands.

In ancient Rome, Cicero warned:

And what is the meaning of an abolition of debts, except that you buy a farm with my money; that you have the farm, and I have not my money?

They say that those who forget history are doomed to repeat it. With the return of the demand for debt relief, we clearly have neglecting our study of history.

– Michael E. Newton is the author of the highly acclaimed The Path to Tyranny: A History of Free Society’s Descent into Tyranny. His newest book, Angry Mobs and Founding Fathers: The Fight for Control of the American Revolution, was released by Eleftheria Publishing in July.

Occupy Wall Street: The Return of Shays’ Rebellion

One of the demands by the Occupy Wall Street protestors is student loan relief. According to a report by CNBC:

It may be hard to pin down exactly what the Occupy Wall Street protesters want, but one of the sources of their frustration seems clear. Many of the demonstrators are drowning in student debt.

[…]

One proposed list of demands for the Occupy Wall Street movement includes “free college tuition” and “immediate across the board forgiveness” of student debt. While neither demand may be very realistic, the student debt problem is very real.

[…]

Of course, if some of the protesters get their way, with free tuition and debt forgiveness, the problem might go away. Rose Swidden, the agriculture student-turned-protester, acknowledges the demands may be far-fetched, but said it is worth a try.

“Sometimes if you shoot for the moon, you land in the stars.”

This is not the first time the United States has seen these demands for debt relief. The same demand was made 225 years ago during Shays’ Rebellion. As I describe in Angry Mobs and Founding Fathers:

Daniel Shays was one such army veteran disappointed by how the government treated veterans. Shays, who returned to farming after the war, was also angered by how creditors treated farmers who had borrowed money. As delegates from five states met in Annapolis in 1786 to try to fix some of the defects of the Articles of Confederation, Daniel Shays led a rebellion of 1,200 men against the Massachusetts government.

General Henry Knox wrote to George Washington explaining the objectives of Shays and his followers: “Their creed is, that the property of the United States has been protected from the confiscation of Britain by the joint exertions of all, and therefore ought to be the common property of all; and he that attempts opposition to this creed, is an enemy to equity and justice, and ought to be swept off the face of the earth… They are determined to annihilate all debts, public and private, and have agrarian laws, which are easily effected by the means of unfunded paper money, which shall be a tender in all cases whatever.”

While Shays’ Rebellion was put down quite easily, it could have easily led to civil war (from Angry Mobs and Founding Fathers):

Shays’ Rebellion was put down in January 1787 by a well-armed force of 4,400 men. Alexander Hamilton noted how close America came to civil war: “Who can determine what might have been the issue of her late convulsions, if the malcontents had been headed by a Caesar or by a Cromwell?”

In fact, although the rebellion itself was stopped and no Caesar or Cromwell emerged, the story did not end there (from Angry Mobs and Founding Fathers):

The rebels were pardoned and they succeeded in elections the following year. The new legislature passed the debt relief that the rebels demanded.

Shays’ Rebellion was all about debt relief, which is a major demand of the Occupy Wall Street protests.

We surely should heed the words of General Henry Knox and Alexander Hamilton and swear off this idea of debt forgiveness. Debt forgiveness is nothing more than stealing from a large number of people to satisfy the demand of a small but vocal minority.

– Michael E. Newton is the author of the highly acclaimed The Path to Tyranny: A History of Free Society’s Descent into Tyranny. His newest book, Angry Mobs and Founding Fathers: The Fight for Control of the American Revolution, was released by Eleftheria Publishing in July.

The Founding Fathers Solve Our Debt Crisis

The United States accrued a huge debt to fight the American Revolution. The debt equaled 35 to 40 percent of GDP at a time when government spending and taxes were just 2 percent of GDP. Interest consumed about half of the government’s revenues. Numerous states and the government under the Articles of Confederation were negligent in paying interest and principle.  The nation faced a real debt crisis.

The Founding Fathers recognized the burden of such a large debt and wanted to pay it off.

Read the rest at What Would the Founders Think…

Sovereign debt crisis hits record levels. Preview of United States?

A quick look at the charts shows the sovereign debt crisis has hit record levels along with European interest rates:

Greece 10-year yield:

Ireland 10-year yield:

Portugal 10-year yield:

With 10-year interest rates up at 14.9, 10.5, and 9.5 percent (and two-year rates even higher in many cases), it is hard to see how these countries can afford to pay these rates. If the United States were paying a 10% interest rate with debt about 90 percent of GDP, 9 percent of GDP and about a third of federal spending would go just to paying interest on the debt. In Greece, where debt is about 130 percent of GDP, the government is spending about 19.4 percent of GDP on interest. This is clearly unsustainable, which is why everybody expects these countries to “restructure” their debts, a euphemism for defaulting and paying back less than they owe. This expectation is a self-fulfilling prophecy because it pushes rates even higher.

With the situation in the United States only marginally better, how long before rates rise here and the U.S. defaults? Best to cut spending now, when we have a choice, than later when interest rates rise and the government has to divert spending to interest payments.