Twin Deficits!

By Gary North

 

There are two deficits that we hear about most: the federal government's deficit and the balance of payments of the United States. They are linked, but they are very different in their effects.

 

The federal deficit is seen by Keynesians as mostly a benefit and by Austrians as mostly a liability, and for the same reason: higher government spending.

 

The balance-of-payments deficit is seen by virtually all economists as a benefit for Americans and their creditors. Otherwise, the exchanges would not take place.

 

At some point, the twin deficits will become unsustainable. Then the debtors will have a choice: either default or else adopt a systematic reversal of policies: debt repayment. This means a federal-budget surplus and a balance-of-payments surplus. Balanced budgets won't do it. There will have to be surpluses.

 

That day is coming. That will be the day of reckoning — of counting up.

 

The participants give no indications that they believe that day is coming.

 

Neither did Greece's politicians in early 2010… (Read more)

 

Source: Mises.org

The Risk of Sovereign Debt

By David Howden

 

With a 50 percent haircut recently given on the Greek sovereign-debt question, investors are increasingly asking what the real risk of sovereign debt is. It would appear that investors underpriced the risk inherent in sovereign debt, especially that of Europe's periphery. One might even go so far as to say that investors made foolish choices in the past and are now getting their just deserts.

 

Such statements require an assessment of what the specific risk is of holding sovereign debt, and how specific European institutions affected these risk factors.

 

Debt is in almost all cases collateralized by some asset. A mortgage is backed by the value of the house that it is borrowed against. Student loans are backed against the future earnings ability of the student (or their parents' income and assets if cosigned). In almost all cases debt is collateralized by the asset that it is used to purchase.

 

Sovereign debt is slightly different, as no clear asset stands ready to serve as collateral. Instead, borrowing is backed by the future taxing capacity of the state. When investors purchase sovereign debt, they do so knowing that if their plans turn out wrong they will not be receiving some portion of that state's assets as the consolation prize. They purchase the bond knowing that the ability to repay is conditioned by the future economic health of the country, and also by its future taxing power. As there is a general negative relationship between tax rates and economic health there is an upper bound on how much tax revenue can be raised in the future to pay off debts incurred today.

 

When we say that sovereign debt is "risk free," we mean that there… (Read more)

 

Source: Mises.org