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Austerity Programs for the EU?

UtahBill

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I have been reading online about Portugal, Hungary, Romania, Greece, Germany, and the UK considering austerity programs. Seems to me that this has been a long time coming, with leaders knowing it was coming, but living in denial about it.
I also read that tax cheating in some countries is so bad that the govts can't get enough income, Greece in particular.
I guess if we want to follow their lead we should cut taxes some more and encourage cheating, right?

Will the next political/financial revolution be over entitlements that bankrupt governments?
Everyone wants a bigger piece of the pie, from welfare recipeints and seniors to the corporate world.
Some economists might suggest that we need a bigger pie. I think we all need to go on a diet....

I wonder how that would work in the USA? Can the econ majors elaborate on the possibilities?
 

donsutherland1

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IMO, the U.S. needs to work toward fiscal consolidation, with the first concrete deficit-reduction measures being implemented next year.

The U.S. still has a window of opportunity to manage a smooth transition from its current situation to fiscal sustainability. Interest rates remain abnormally low, as the U.S. still enjoys "flight-to-quality" benefits. As a result, even as the U.S. debt has risen markedly following the financial crisis/severe recession, the debt service costs have grown much less rapidly. Nonetheless, as interest rates rise in the future for cyclical reasons, competing investment alternatives, risk perceptions, etc., U.S. debt service costs will grow more in line with the increase in debt that has occurred. A rise in long-term rates would reduce long-term economic growth. That could lead to reduced revenue growth and foregone investment. In turn, foregone investment could undermine U.S. competitiveness and further cap long-term growth potential. As all that happens, questions about the U.S. fiscal path will increase. For now, that's still a medium-term issue.

To move onto a fiscally sustainable path, the U.S. will need to engineer its own austerity approach. Tax hikes are unavoidable. The current tax structure is inadequate for meeting the nation's long-term financial needs barring a disruptive reduction in expenditures that is all but improbable. At the same time, tax hikes cannot be excessive. Difficult decisions, including the reform of the mandatory spending programs (Social Security is probably easiest to reform) and fundamental health care reform. Some political leaders would argue that health care has already been reformed. Unfortunately, the excessive cost growth issue was not addressed. Until that happens, Medicare and Medicaid, even with benefit formula changes, will remain on an unsustainable path.

In the private sector, U.S. firms will need to improve their competitiveness. The U.S. can ill-afford to continue to run significant current account deficits and the competitive gaps at the heart of those deficits need to be addressed. Similarly, American households will need to slow their growth of leverage in the post-recession years. Absent public sector policy changes, more moderate leverage by American households, and improved economic competitiveness, the U.S. would be forced to confront its fiscal challenges in the context of excessive household debt and suboptimal economic competitiveness. In that more vulnerable setting, any shift in capital flows could have a larger macroeconomic and fiscal impact than would otherwise be the case.
 

UtahBill

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Thanks, Don, just got around to giving your post the time for a good read....
As retirees who did better than we expected, we are trying to stimulate the economy by spending a lot of money, but nearly all of it is to local contractors. That means we are finishing our 1800 sq. ft. basement...

We were alwalys savers, but not obsessively so. Now we are learning a new economic mindset, that of being spenders. The kids are doing well, and the grandkids will get the bulk of our assets when we go, but only if they use it for education.

I have always wondered at the mindset of so many of our friends and relatives, the ones we are close enough to that we know their spending habits. Unbridled optimism seems to have been their only mindset, when it comes to their future. I fear that the USA will soon get hit with yet another economic disaster that sets us all even further back than we are.
 

bennyhill

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America pratice what you preach! With your +1,780 billion dollar federal deficit you have no need to lecture Europe our our meager deficit. Germany has for example only 2,2 billion dollars.
The reason all of us are in the hole is that politicians want to get relected and continue to buy vote from business and voters in general through social services. And of course military spending is out of control dont you think?
 

Civil1z@tion

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America pratice what you preach! With your +1,780 billion dollar federal deficit you have no need to lecture Europe our our meager deficit. Germany has for example only 2,2 billion dollars.
The reason all of us are in the hole is that politicians want to get relected and continue to buy vote from business and voters in general through social services. And of course military spending is out of control dont you think?
The absolute numbers are not what matter. European countries nearly universally have high debt-to-GDP ratios than the US. That and the deficit-to-GDP rations (which up until the current crisis the US would have qualified to get into the Eurozone on its deficit, something many European countries failed to do but were let in anyways). The US debt is pretty bad right now, but its Europe that's pushed it to the crisis point even before the recession.
 

bennyhill

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You dont even know where Europe is without a Navi, what makes you think you can have an opinion concerning european affairs?
 

UtahBill

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You dont even know where Europe is without a Navi, what makes you think you can have an opinion concerning european affairs?
but you can have an opinion about the USA?
 

Civil1z@tion

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You dont even know where Europe is without a Navi, what makes you think you can have an opinion concerning european affairs?
Really now? You know what I know about Europe more than I do? I suppose studying in Europe for half a year, studying the region in detail both at home and in Europe, and generally having a fascination with the continent and its politics would leave me with absolutely no understanding of Europe (not to mention the fact that I'm right about the debt to GDP ratios).

But of course showing off any knowledge I have about Europe will just be explained away as a Google search rather than pre-existing knowledge so I suppose I shouldn't bother trying. I could point out that the Netherlands is likely to get its first liberal PM since 1918, Germany's CDU/CSU-FDP coalition lost control of the Bundsrat when the Social Democrats made gains in the North-Wesphalian Rhine state, the EU is likely to fail to meet its goal of a free-trade area in it Union for the Mediterranean (formerly the Euro-Mediterranean partnership) by this year, Romania has been getting in trouble for failing to meet the EU's requirements on corruption, the Euro has fallen from a high of a bit over 1.5 USD per Euro in November to a little under 1.2 USD per Euro earlier this month, that Silvio Berlusconi, the current conservative PM of Italy, also owns a majority of Italy's private media companies, a couple years ago Switzerland entered the Schvengen area with the EU meaning they have open borders with the EU and stricter borders with non-EU countries, which meant closing the border with Liechtenstein, the Lisbon Treaty gave more powers to the EU parliament through the process of co-decision with the EU Commision, the EU has seven countries with constitutional monarchies (Europe as a whole has 12), and the innumerable other important and unimportant factoids I can recall about Europe without a Google search. But I'm guessing you're just going to continue to assume I'm just an idiot who knows nothing about Europe. If that's the case, fine, but ad hominem insults in the future will just be ignored.
 

bennyhill

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Thats all everyday knowledge that you could get from CNN, or the economist, which is far better than ABC, NBC, CBS, FOXNews or USA Today. Living in a country for 6 months is rather short, but on the upside that is longer than the 99% of what most americans can offer.
 

PeteEU

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The absolute numbers are not what matter. European countries nearly universally have high debt-to-GDP ratios than the US.
Err no. By your own link later on there are quite a few nations with lower debt-to-GDP ratios than the US. Plus you have to look at the composition of the debt. Internal debt like in France and Germany is not as problematic as external debt like in Greece. Japan has lived on 200% debt vs GDP for decades because a huge portion of that debt is internal. Also the US will pass most European nations in debt-to-GDP rations this or next year I believe. European debt-vs-GDP ratios are relatively stable with a few exceptions.. like the UK, and they will fall once the world is out of this speculator and fear motivated financial roller-coaster ride.

That and the deficit-to-GDP rations (which up until the current crisis the US would have qualified to get into the Eurozone on its deficit, something many European countries failed to do but were let in anyways). The US debt is pretty bad right now, but its Europe that's pushed it to the crisis point even before the recession.
Wrong on so many fronts. First off you are generalising a whole continent. Denmark for example has no external state debt, where as Greece as a lot. The UK's climbing hand over fist, and yet quite a large portion of the debt is very long term (30 years). Each nation has its own story.

And as for the claim that Europe was pushed to crisis point even before the recession.. a load of crap.

If we take out the anomaly of Greece (they lied after all), then the state of the state finances in almost all Eurozone countries was within the rules set out by the Eurozone. It was only when the US sub-prime crisis froze the credit markets, and countries were forced to push stimulus into the economy. bail out banks and companies and pay higher unemployment costs, that the state finances started to look what they look like today. For example, Ireland and Spain had budget surpluses before the crisis. So it is very disingenuous that Europe was ain a crapper before the crisis because it is simply not true, especially when compared to the US.

The US only avoided the "crapper" sign because of its growth. That is why the US needs 3.5% growth per year (highly unrealistic now days) to maintain just the status quo. Now days, if the economists were not so biased, they would realize the monumental challenges that the US has in front of it. But they are ignoring it, because owning up to it, would mean politically unpopular admissions.

But unlike the US, Europe is dealing with its problems. In the US there is no talk about austerity measures what so ever and with the political structure there is very little chance that any austerity measures will happen before it gets really bad. The US is living in a dream that its consumer will get it out of the hole it is in, which is highly unlikely. On the epic scale of economic problems, the scale of the Eurozone and European problems is minor compared to what the US has to go through.
 
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bennyhill

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American economist cant afford to say the king (federal government) is naked! Why? My guess is that they have so many of their own assests invested in american bonds & stocks and real-estate that they would be losers too, if speciulators would do a PIGS on Wall-Street? Am I close. I also dont trust your rating system, because companies like Moodys are not independent, they live from the companies that they rate. Am I close? I think I hit the mark.
 

washunut

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American economist cant afford to say the king (federal government) is naked! Why? My guess is that they have so many of their own assests invested in american bonds & stocks and real-estate that they would be losers too, if speciulators would do a PIGS on Wall-Street? Am I close. I also dont trust your rating system, because companies like Moodys are not independent, they live from the companies that they rate. Am I close? I think I hit the mark.
I think the reason is less that stocks and bond values would go down, but interest rates on government debt would rise, increasing further our deficit problem. Right now foreignors are still buying up our debt at very cheap rates, we should thank them.

On the rating agencies. They are paid just like the firms that audit the financial results of all public companies. The system is not great, but not sure what a better answer is. What is the saying, don't let perfection be the enemy of the good. Rating agencies failed big time in the housing market, but in general have done an OK job in my view.
 

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I think the reason is less that stocks and bond values would go down, but interest rates on government debt would rise, increasing further our deficit problem. Right now foreignors are still buying up our debt at very cheap rates, we should thank them.

On the rating agencies. They are paid just like the firms that audit the financial results of all public companies. The system is not great, but not sure what a better answer is. What is the saying, don't let perfection be the enemy of the good. Rating agencies failed big time in the housing market, but in general have done an OK job in my view.
if interest rates on government debt rises typically you would see the P/E ratio on stocks go down, leading to a decrease in the stock value. The reason of course is that generally corporations are more likely to go bankrupt then governments and people place a larger risk premium on stocks and corporate bonds
 

bennyhill

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They Rating agencies should operate independently and have no finanical benifits from the companies and countries they rate.
 

washunut

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They Rating agencies should operate independently and have no finanical benifits from the companies and countries they rate.
So how would they be paid for their services?
 

washunut

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if interest rates on government debt rises typically you would see the P/E ratio on stocks go down, leading to a decrease in the stock value. The reason of course is that generally corporations are more likely to go bankrupt then governments and people place a larger risk premium on stocks and corporate bonds
That is true stocks may go down a bit. As you know if stocks were selling at a normal P/E in relation to 10 year treasuries plus a risk premium the current P/E ratio would be higher than it is today. So treasuries could rise and have not a great impact to stocks currently.
 

bennyhill

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All banks would be taxed and these raiting agencies would live from that.
 

donsutherland1

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On the rating agencies. They are paid just like the firms that audit the financial results of all public companies. The system is not great, but not sure what a better answer is. What is the saying, don't let perfection be the enemy of the good. Rating agencies failed big time in the housing market, but in general have done an OK job in my view.
Actually, based on the empirical evidence, the question as to how much value the ratings agencies actually provide is highly pertinent. The debacle with asset-backed/mortgage-backed securities is, sadly, not the exception. For example, in their seminal study on banking crises and currency crises, Carmen Reinhart and Kenneth Rogoff found that the Institutional Investor and Moody's sovereign ratings did worst in providing early warning of banking crises and currency crashes. For the former crises, real exchange rates and real housing prices did best (that the U.S. financial crisis erupted in the wake of the bursting of the nation's housing bubble and what had been a sustained decline in the value of the U.S. dollar that began paring the rush of capital inflows that had been occurring during the run-up of the housing bubble is par for the course). The latter were best predicted by a combination of real exchange rate trends, banking crises, magnitude of current account deficits. When it came to sovereign debt crises, again the ratings agencies were typically far behind the curve, often caught by "surprise" i.e., ratings downgrades followed the onset of the Asian financial crisis and Greece's debt was downgraded to junk status only after Greece was in the throes of a debt crisis.
 

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Actually, based on the empirical evidence, the question as to how much value the ratings agencies actually provide is highly pertinent. The debacle with asset-backed/mortgage-backed securities is, sadly, not the exception. For example, in their seminal study on banking crises and currency crises, Carmen Reinhart and Kenneth Rogoff found that the Institutional Investor and Moody's sovereign ratings did worst in providing early warning of banking crises and currency crashes. For the former crises, real exchange rates and real housing prices did best (that the U.S. financial crisis erupted in the wake of the bursting of the nation's housing bubble and what had been a sustained decline in the value of the U.S. dollar that began paring the rush of capital inflows that had been occurring during the run-up of the housing bubble is par for the course). The latter were best predicted by a combination of real exchange rate trends, banking crises, magnitude of current account deficits. When it came to sovereign debt crises, again the ratings agencies were typically far behind the curve, often caught by "surprise" i.e., ratings downgrades followed the onset of the Asian financial crisis and Greece's debt was downgraded to junk status only after Greece was in the throes of a debt crisis.
While you might say the ratings agencies are behind the curve, the ratings are an integral part of the financial system.. and some would claim too integral.

Markets react in panic when these agencies downgrade a country or company despite that the markets knowing nothing has actually changed. Spain is an almost classic example. Fitch downgraded Spain from AAA to AA+ a month or so ago and the markets went into a panic mode. When the news organisations started to interview the Fitch people, then suddenly the markets noticed that the downgrading also meant that Spain went from downward outlook too stable outlook.. something they had missed at the start. Then the markets recovered over the next day. And for the record AA+ is still one hell of a good rating as the Fitch rep. said. So if the ratings agencies are behind the curve, then the markets should have factored in a downgrade for the most part.. but they have clearly not since a downgrade can start of massive selling and panic. And the real problem with Fitch's downgrade and the markets is that S&P downgraded Spain a few weeks earlier so there is no excuse what so ever for the markets not to have factored in such a downgrade.

And in the case of Greece I would claim the ratings agencies along with the speculators and naked short selling pushed Greece over the edge. Greece did not even get time to sort out its house before the markets turned on Greece and drove it to the brink and the ratings agencies had a huge part in that since each time they downgraded Greece for whatever reason, they forced up the yield on Greek bonds, which in turn meant they had to downgrade Greece yet again. A snowball effect. And when you have 3 major agencies then you get snowball effect fast if the markets keep reacting in panic mode for each downgrading or warning and it all happens with in a few weeks or months and there is no freaking way any country or company can fix a problem in that short a time.

That is why I say dissolve all rating agencies and form a single independent agency to value large assets. The present system clearly does not work and is easily manipulated by the big players as we saw with Lehman Brothers and the sub prime crisis.
 

donsutherland1

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While you might say the ratings agencies are behind the curve, the ratings are an integral part of the financial system.. and some would claim too integral.
To be sure, I'm not suggesting that ratings should be eliminated. I do believe that the practices deployed by the ratings agencies need dramatic improvement and the assigned ratings need to be far more reliable. That will mean a lot more work, as the simple approach of largely inputting data (which is not generic) into models and then running with the results has had a dismal track record when subjected to empirical data. Fixing things will require far more active human judgment and analysis, really digging into data, working to understand the context in which countries/companies function, drawing upon relevant historical analogs, and providing probabilistic scenarios and milestones along each reasonably possible path, among other things. Such fixes won't limit error, but the quality, utility, and reliability of information should be markedly improved. As noted earlier, if the empirical research suggests that even simple data such as current account data provides a much better picture of risk than the current ratings system, then payments that are provided to ratings agencies are furnishing negative value.

Markets react in panic when these agencies downgrade a country or company despite that the markets knowing nothing has actually changed. Spain is an almost classic example. Fitch downgraded Spain from AAA to AA+ a month or so ago and the markets went into a panic mode. When the news organisations started to interview the Fitch people, then suddenly the markets noticed that the downgrading also meant that Spain went from downward outlook too stable outlook.. something they had missed at the start. Then the markets recovered over the next day. And for the record AA+ is still one hell of a good rating as the Fitch rep. said. So if the ratings agencies are behind the curve, then the markets should have factored in a downgrade for the most part.. but they have clearly not since a downgrade can start of massive selling and panic. And the real problem with Fitch's downgrade and the markets is that S&P downgraded Spain a few weeks earlier so there is no excuse what so ever for the markets not to have factored in such a downgrade.
Market prices reflect a combination of fundamentals and psychology. Sometimes the bias is toward one end and sometimes the other. Markets can be reasonably rational. They can also grow irrational. Hence, markets can and do go to excess, sometimes for extended periods of time. The theory that markets are enormous "discounting mechanisms" (quite accurately reflect all that is known about a company or country) is incorrect. Human foresight--be it individual or collective--is very limited, so by definition no human institution or construct can avoid the limitations of human foresight. Indeed, if markets were very good discounting mechanisms, short- and long-term volatility would be far lower than it is, because markets would have a good understanding of where things stand and they would not be continually caught by surprise by major economic developments, not to mention non-economic ones. Of course, there are also unforeseeable events, too, and those add a further limitation on use of markets to discount the future. In short, markets offer one piece of guidance, but one still needs to dig deeper to determine whether such guidance is reasonable given the situation or it is not.

And in the case of Greece I would claim the ratings agencies along with the speculators and naked short selling pushed Greece over the edge. Greece did not even get time to sort out its house before the markets turned on Greece and drove it to the brink and the ratings agencies had a huge part in that since each time they downgraded Greece for whatever reason, they forced up the yield on Greek bonds, which in turn meant they had to downgrade Greece yet again. A snowball effect. And when you have 3 major agencies then you get snowball effect fast if the markets keep reacting in panic mode for each downgrading or warning and it all happens with in a few weeks or months and there is no freaking way any country or company can fix a problem in that short a time.
While the sudden ratings downgrades amplified the adverse developments concerning Greek debt, I believe Greece should have been at junk status well before the debt crisis erupted. Greece has a long history of debt default. To assume that the fairly recent lack of such difficulty was a "new normal" so to speak was absurd, especially when one considered the magnitude of Greece's fiscal deficits, its enormous current account deficits, that 99% of its debt was held by foreigners, and the long-term fiscal challenges confronting the country.

That is why I say dissolve all rating agencies and form a single independent agency to value large assets. The present system clearly does not work and is easily manipulated by the big players as we saw with Lehman Brothers and the sub prime crisis.
I don't know whether a new ratings agency or multiple new ones would be more effective (I'd probably lean toward the latter, as competition can improve industry performance). But there is little doubt that the present approach, bad understanding of risk, lack of due diligence due to overreliance on models that prove badly flawed time and again, conflicts of interest, lack of regular reporting/transparency concerning effectiveness of assigned ratings, among other factors, does not work. Unfortunately, it appears that U.S. financial regulatory reform will not produce the dramatic overhaul that is needed in that business.
 

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Wouldn't a single agency be more susceptible to fraud or ineptitude than several competing agencies?
 

bennyhill

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I heard in televison that the raiting agencies eg Moodies tell their cusomers in writing that their recomendations should not be taken as guidlines for decision making. This frees them from legal suits, but what authority do these agencies have, when their recommendations arent worth anything?
 

bennyhill

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Dont see why. As it is there all corrupt. What we need is some none american raiting agencies from Europe and asia.
 

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Dont see why. As it is there all corrupt. What we need is some none american raiting agencies from Europe and asia.
Are you suggesting that the EU has more honest people, per capita, than the US?
Get your own house in order first....
 

bennyhill

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I would suggest yes! America is the land of greed and selfish greed. If the EU and Asia have their own agencies, then at least banks can make comparison. I for my part have zero trust in Moodys etc.
 
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