The economic news just keeps on getting worse

[unixronin]

Both in the US:

As the Obama administration pushes through Congress its $800 billion deficit-spending economic stimulus plan, the American public is largely unaware that the true deficit of the federal government already is measured in trillions of dollars, and in fact its $65.5 trillion in total obligations exceeds the gross domestic product of the world.

[...]

The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the "2008 Financial Report of the United States Government" as released by the U.S. Department of Treasury.

And in Europe:

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities.  It must repay – or roll over – $400bn this year, equal to a third of the region's GDP.  Good luck.  The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel.  The budget is based on Urals crude at $95.  Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60% of mortgages are in Swiss francs.  The zloty has just halved against the franc.  Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story.  As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle.  There is a crucial difference, however.  European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks.  En plus, Europeans account for an astonishing 74% of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50% more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51% in January, and Brazil lost 650,000 jobs in one month).  Britain and Switzerland are up to their necks in Asia.

According to the first article, the US has little choice but to monetize its debt — which is a euphemism for "start printing money with nothing to back it" — and according to the second, the IMF is in the same boat.

So this got me thinking (again).  What do we all do, if the entire global economy implodes?  If all the banks fail or stop doing anything but collect money, and the world's governments all start printing money trying to inflate themselves back to paper solvency, and their currencies start chasing the Zimbabwe dollar?

Comments

[skellington.livejournal.com]

The short version is that a 75 year projection of the US deficit isn't that useful.

Social Security is funded out through about 2039, assuming the "middle" of the three forecasts they're using. On the optimistic forecast, it never runs out of money. If we get to 2039, current taxes will cover about 75% of current benefits. So, give or take, a 25% increase in the 12.6% social security tax (including employer half) can get fixed with about a 4% tax increase. Not beautiful, but it isn't something to get worked up over.

(The law requires the social security administration to start planning on what to do when the trust fund shows a deficit within the next 10 years. So in theory, we start worrying about it in 2029 or so.)

As for medicare/medicaid (which is the vast majority of the rest of that number), the answer is that it is based on medical spending costs that increase dramatically faster than GDP+inflation. Extrapolated far enough, in the 2030's or 2040's, the entire salary of an average person will go just to pay for their medical care. (And that assumes that we have any clue what medical care will be like in 30 years. Think we'll finally have some decent products based on mapping the genome?)

This trend obviously can't continue. At some point, insurance providers, including the federal government, will stop paying for certain procedures. Either the medical industry will get more efficient (including patents on drugs expiring, etc.) or cancer drugs that cost hundreds of thousands of dollars, and have a 1% cure rate won't be covered. Either way, medical costs will get capped at some fraction of the GDP.

The rest of that mess; well, lots of countries are about to go bankrupt. The US is actually in better shape than most of them. (And if you think our entitlement issues and demographics are bad, look at Italy's!)

[ithildae.livejournal.com]

Not just Italy, most of Europe is a demographic mess. When it comes to important resources (like food) we are a very rich nation. We have the fundamentals to do ok through this mess, we just need to keep the shortsighted and the power hungry from damaging our prospects. Not easy, but certainly within reach.

[unixronin.livejournal.com]

Yeah, I was looking at Italy. Deficit of 112% of GDP projected next year....

[skellington.livejournal.com]

Yeah, but their long term demographics are even worse.

They have a negative population growth, and they're going to be very elderly heavy in their population before too long.

I've seen some of it attributed to social pressure on women not working (and women who have kids not being able to easily go back to work.) That eliminates both the women working before and after kids, and also discourages women who do want to work from ever having them.