Time Is Running Out for the West

Ambrose Evans-Pritchard, Telegraph.co.uk, 17 Aug 2010

The Great Recession has dramatically shrunk the time left for the big AAA states to prevent a full-blown sovereign debt crisis as their demographic time-bomb threatens, US rating agency Moody’s has warned.

Ambrose Evans-Pritchard, Telegraph.co.uk, 17 Aug 2010

The Great Recession has dramatically shrunk the time left for the big AAA states to prevent a full-blown sovereign debt crisis as their demographic time-bomb threatens, US rating agency Moody’s has warned.

"Genuinely adverse debt dynamics were only expected to materialise in 15 to 20 years. The crisis has ‘fast-forwarded’ history, eroding all the time available to adjust, " said the group’s quarterly Sovereign Monitor.

Moody’s fears that the US will crash through its safety buffer by 2013 if growth falters (adverse scenario), with interest payments topping 14pc of tax revenues. The debt-to-revenue ratio has already doubled in three years to 430pc.

The US, UK, Germany, France, and Spain are all at risk of an "interest rate shock", either because they must roll over a cluster of short-term debt (US, France, Spain) or because deficits are so large.

Countries that "fail to demonstrate the level of social cohesion required to stabilise debt" will lose their AAA rating. "Intra-generational" conflict between young and old requires careful handling. States that delay pension reform risk spiralling downwards.

Moody’s said the world had changed since Europe’s debt crisis. None of the large sovereign states can still assume it is credit-worthy. "The burden of proof now falls on governments," it added.

Britain has the safety cushion of long debt maturities, but the structural deficit is causing debt "to grow an unsustainable rate": the UK is clearly one of the weaker countries in the AAA peer group.

Moody’s expects Britain’s public debt to reach 90pc of GDP within three years. It warned that any slackening in fiscal tightening by the Government squeeze would lead to a "sharp rise" in funding costs if growth also slowed, with a nasty effect on debt dynamics.

The warning appears to vindicate the Coalition’s claim that immediate belt-tightening is needed to restore confidence and head off a gilts crisis where markets would impose harsher measures.

The current crisis differs starkly from the "one-off" debt spikes after the Second World War, when young economies were able to outgrow the debt burden. This time the threat lies ahead as the aging crisis drives up pension and health costs on a static tax base. "While the current stock of debt is large, it is dwarfed by the accumulation of future liabilities if policies do not change."

  1. The international debt crisis

    Evans-Prichard’s analysis of the international crisis that struck the Western economies is worth reviewing and dissecting to find a healthy therapy solution(s) to the world economies. Piling up forces in several countries by states far from their neighbourhood is a kind of neo colonialism; the daily non productive spending on these forces (and the ensuing deaths of humans) looks no more a Keynesian deficiteering concept.

    The world today looks like the 30s to 40s of the 20th century which produced the 2nd WW. Unless all parties concerned reconcile their appetites to the size of their stomach, and an equitable justice is introduced, the world is at the door of an intellectual and moral abyss.

  2. Very sober thinking required

    The article is an excellent wake-up call, but I would suggest that Mr. Bouldoukian’s comment is even more profound.

    There is no need to cite his credentials and accolades in the field. He is well known to those who have been attentive. His short paragraphs pack so much wisdom they need to be expanded on in separate essays.
    He is right on that the expansion to empire status by the US post-WWII foreign policy establishment has created, at best, a financially unsustainable situation. Over 200 military bases around the globe (there are not even as many nations in the UN) has been unviable for a while. It could only be kept up by an equally unsustainable demand for the US dollar as an international hard currency which is tightly coupled with the international petroleum and arms trade. Shocks to the system, through global politico-economic meltdown did and will have long term repercussions. In the end, it is perhaps arguable that given a sufficient level of aggregation, everything is a zero-sum game. Gains in one field are couterbalanced by losses in another. No one can win all the time, or as it is better said, you cannot fool all the people all the time, no matter how hard you try.

    At worst, this policy has created an unmatched level of animosity towards the US in world. This certainly does not bode well for the future of our planet.

    The real tragedy for American citizens is that they are mostly unaware that their country is, for all intents and purposes, a military state. For the simple reason that the largest piece of the pie of the revenues and expenditures of their public funds are allocated to the military, most of the manufacturing capacity is dedicated to military or military-related output, most of the research in any field has some kind of defense connection, and any commercial applications, are fundamentally offshoots of initially defense-backed expenditures, particularly in the aerospace and hi-tech fields, and most people who are still employed in the private sector are likely employed by defense or related industries. This was what Eisenhower was warning against over 60 years ago. In a sense, it is yet another example of lack of economic diversification and increasing risk at a very macro level.

    The real challenge for America and the world is to decouple itself (and very quickly) from such reckless reliance on war-mongering as a source of "wealth". That is why Mr. Bouldoukian is right again in his compact second paragraph. After all, if with our cumulative weaponry we can destroy the planet completely and utterly 20 times over, since only once would be more than enough, by any measure and point of view, even for the most aggresive capitalist, that is 19 times too many and a collosal waste of resources.
    Paregamoren, Viken L. Attarian

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