Tag Archives: Financial services

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.


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.

Sovereign debt crisis worsening. Governments paralyzed. Solution too hard to swallow.

Despite all the governments’ efforts, or maybe because of them, the sovereign debt crisis is only getting worse. Marketwatch reports:

The euro zone’s sovereign-debt crisis intensified Tuesday, with yields on Spanish, Italian and other peripheral government bonds soaring in the wake of a weekend meeting of European Union finance ministers that failed to soothe fears of the potential for future defaults.

The yield on 10-year Spanish government bonds jumped to around 5.63%, strategists said, a day after surging to 5.43%.

The move sent the yield premium demanded by investors to hold 10-year Spanish debt over comparable German bunds to more than three full percentage points.

“Ireland’s bailout did nothing to ease the euro-zone debt crisis: it might have even made it worse,” said Steven Barrow, currency and fixed-income strategist at Standard Bank. “For now the market sees a pattern emerging and the next piece of the bailout puzzle seems to be Portugal, with Spain to follow after that.”

The yield on 10-year Italian bonds also rose for a second day to hit 4.77% from around 4.64% on Monday. Portuguese, Greek and Irish bond yields also rose. And outside the periphery, the Belgian 10-year bond yield continued to climb, hitting 3.97% versus around 3.86% on Monday.

How long before Europe realizes that bailing out the banks, announcing plans to cut their deficits to 3 percent in four years time, and getting bailouts from EU and IMF will not work? The sovereign debt crisis will continue until these European countries announce balanced budgets effective immediately (2011) or, at the worst case, next year (2012) and that they will never again bail out the banks. They also have to leave the Euro, which is partly responsible for the mess to start with.

Unfortunately, I doubt the European governments will implement these measures. And if they were to do so, the people would be in full revolution. The only easy way out I see is if the economy suddenly stages a huge recovery. Barring that, it looks like things will be getting worse, possibly much worse.

Sovereign debt crisis spreading to first world countries.

I’ve written about the sovereign debt crisis numerous times already. See here, here, here, here, and here. But so far, I’ve only written about those “at-risk” countries such as Portugal, Greece, Spain, and Ireland or individual states such as Illinois. In other words, the sovereign debt crisis has so far been limited to “small” countries or states. Debt defaults among these countries or states certainly would cause problems and a sharp decline in financial markets, but likely wouldn’t break the bank. But if this crisis spreads to larger, more financially important countries, it would obviously have a much larger impact, possibly one similar to the stock market crash of 1929.

Marketwatch reports that the sovereign debt crisis may in fact be spreading to a first world nation:

There’s no ‘B’ in PIIGS, but Belgium could eventually cause headaches of its own for the euro zone if a bitter and protracted political fight prevents the country from hitting its deficit-reduction targets.

Belgium, in northern Europe, has seemed an unlikely candidate for sovereign-debt troublemaker. From a fiscal perspective, the country, whose capital Brussels is the home of the vast EU bureaucracy, has been associated more with the so-called core of the euro zone than the troubled “periphery.”

But an increasingly bitter political divide along linguistic lines has left Belgium without a government since April and is beginning to raise some concerns.

Belgium, which has enjoyed solid growth, appears on track to reduce its budget deficit to 4.8% of gross domestic product this year from 5.6% in 2009, economists said. The nation’s deficit is among the lowest in the euro zone and compares well with other core countries, including Germany at 4.5% of GDP, France at 8% and the Netherlands at 6%.

But if a government isn’t formed soon, the 2011 fiscal target of a reduction to 4.1% could be in jeopardy, said Philippe Ledent, an economist at ING Bank in Brussels. That in turn would make it all the more difficult for Belgium to meet its target of bringing its deficit down to 3% of GDP, the EU limit, in 2012.

In reality, a 4.1%, 4.8%, or 5.6% don’t seem too bad, especially considering the 10.6% deficit here in the US for 2010 and 8.3% deficit expected for 2011.

Belgium’s deficit figures raise few alarms, but government debt stands at around 100% of GDP, which compares more closely with Greece and Italy.

U.S. debt, by comparison, also stands at about 100% of GDP.

The financial markets are starting to notice Belgium’s problem:

Belgium has had no problems selling its government bonds. Borrowing costs have risen, however, with the yield premium demanded by investors to hold 10-year Belgian debt over benchmark German bunds standing at around 0.8 percentage point, up from around 0.4 percentage point around the same time last year.

But borrowing costs are far from problematic, Ledent said. Belgium’s premium remains nowhere near comparable to Spain’s, for example, which is at around 1.6 percentage points, much less Ireland’s at around 4 percentage points.

The cost of insuring Belgian debt against default is up sharply since the April elections, but well off the peak seen in mid-June. The spread on five-year sovereign credit-default swaps was at 119 basis points last Thursday, according to data provider CMA. That means it would cost $119,000 a year to insure $10 million of Belgian government debt against default for five years.

The spread stood at around 60 basis points in mid-April before the latest round of political turmoil and peaked at 149 basis points in late June.

“Up to now, there has been no strong impact [on borrowing costs], but I’m not sure it will continue like that,” Ledent said. “If in two, three, four months we still don’t have any government, financial markets will consider that we won’t reach the [budget] target and then there could be an impact on the spread.”

How long can countries like Belgium or the United States continue to borrow at low interest rates? These are countries with deficits exceeding 4% of GDP, in Belgium’s case, or 8-10%, in the United States, with debts equal to 100% of GDP. Logic tells us that in these countries, either taxes have to rise significantly or government spending has to fall sharply. Neither Belgium nor the U.S. is doing much to reduce their deficits and even less to cut government spending. Both countries, along with all other nations, are hoping for and relying on an economic recovery to lift their finances. What if we enter another recession? What if the recovery is slower than they expect, as it has been so far? All this talk of deficit reduction will be gone and we’ll be looking at even larger deficits and debt levels.

Worse yet, what happens when investors demand higher interest rates? As mentioned above, Belgium is already paying an extra 0.4% interest on its debt. That does not sound like much, but with government debt at 100% of GDP, the deficit increases by 0.4% just from the interest payment. This is an additional cost on government at a time when it needs to reduce its costs. It increases the deficit just as the country is trying to reduce it. Furthermore, this creates a self-fulfilling prophecy: worries of a debt crisis will cause a country’s interest payment to rise and deficit to increase, thus increasing the chances of a crisis.

So I will repeat what I’ve written many times: The sovereign debt crisis is far from over. In fact, it is just beginning.

TARP was a waste of money, despite what the Treasury Department tells you.

The Treasury announced that the total cost of TARP would be just $50 billion. In their perverse logic, the Administration and media played this up as a government success story. But we really should look at TARP as an investment. Congress approved spending $700 billion for TARP, of which only $296 billion was spent. Looking at TARP as an investment, the government lost 16.9% over a two year period. And they call that a success!

What else could the government have done with the $296 billion? Since TARP was signed into law on October 3, 2008, the following instruments have produced these returns:

TARP Troubled Asset Relief Program -16.9%
SPY S&P 500 9.1%
TLT iShares Barclays 20+ Year Treas Bond 15.7%
IEF iShares Barclays 7-10 Year Treasury 19.3%
SHV iShares Barclays Short Treasury Bond 0.7%
GLD SPDR Gold Shares 57.8%
XLF Financial Select Sector SPDR -18.8%

All major markets (stocks, long-term bonds, intermediate-term bonds, short-term bonds, and gold) posted positive returns. In some cases, very good returns. As you can see, I added the Financial sector into that table, which declined slightly more than TARP. Most of TARP’s investment were in the financial sector. The small difference is largely a rounding error because I am looking at XLF’s return up to today whereas the Treasury is using expected returns as of some future date. And that is assuming you trust their accounting…

But this raises the question of why they invested in the worst performing market sector? Those of us who argued that they were throwing good money after bad were correct. Maybe Treasury lost less money than we expected, but we were still correct in predicting negative returns on this investment.

Of course, the government claims that TARP saved the financial system from utter destruction. Oh, to live in a world where you can make outrageous claims without any proof. Next thing you know, the government will claim that the American Recovery and Reinvestment Act of 2009, also known as the stimulus bill, “created or saved” millions of jobs, even though the unemployment rate has remained steady near the 10% level.