The Continuing Economic Fake-Out

Contrary to recent wishful thinking, a bad financial outlook for the United States is no longer far off on the horizon.  The Financial Times reports:

Moody’s Investors Service fired off a warning on Wednesday that the triple A sovereign credit rating of the US would come under pressure unless economic growth was more robust than expected or tougher actions were taken to tackle the country’s budget deficit.In a move that follows intensifying concern among investors over the US deficit, Moody’s said the country faced a trajectory of debt growth that was “clearly continuously upward”.

So far, the United States calls Moody’s bluff, with Moody’s backing down with nothing more than a stiff rebuke.  Moody’s fears are no longer abated by the refrain: “Obama inherited a bad economy from Bush.”  Apparently, the monstrosity of a budget presented by the Obama administration has spurred Moody’s to think aloud regarding the United States credit rating.  Hey,… but we’re spending our way back into prosperity?  Not so, according to Moody’s credit officer, Steven Hess:

…the deficits projected in the budget outlook presented by the Obama administration outlook this week did not stabilise debt levels in relation to gross domestic product.

Damn.  But it’s getting better.  The Dow is still over 10,000.  We’re told there’s still growth.  Look at the green shoots.   Right now, Dow Jones says that unemployment is down:

The U.S. unemployment?rate unexpectedly declined in January, but the economy continued to shed jobs and revisions painted a bleaker picture for 2009, casting doubt over the labor market’s strength.The unemployment rate, calculated using a household survey, fell to 9.7% last month from an unrevised 10% in December, the Labor Department said Friday. Economists surveyed by Dow Jones Newswires had forecast the jobless rate would edge higher to 10.1%.

Hopefully, the Fed will be able to screw around with interest rates in order to fix all this.  The only question after that is for whom will the Fed fix it for?  Enough 0f that pessimism!  Think positive.  Think about U.S. federal government continuing to tax and spend invest in a future recovery.  When will that be?  Tomorrow, it’s always tomorrow.

On other economic fronts, the Euro continues its rapid fluctuation.  Last Thanksgiving (2009), the Euro traded at about $1.50 and today, it has gone slightly below $1.37.  Apparently there is trouble in paradise as the Wall Street Journal reports:

Concerns are growing that the world hasn’t seen the last of the economic crisis.

Jitters about the U.S. economy and signs that Greece’s debt woes are spreading across Europe roiled markets on Thursday, driving the Dow Jones Industrial Average briefly below the 10000 mark.

…

Behind the turmoil are worries that a collection of European countries including Portugal, Ireland, Greece and Spain, known derisively as PIGS, won’t be able to finance budget deficits that have ballooned to around 10% of gross domestic product. That has sparked fears that Europe’s decade-old monetary union could unravel.

This sentiment spilled over into markets on Thursday. Although the European Commission had signed off on Greece’s budget plans the day before, confidence was shaken at the same time by a stumble in a Portuguese bond sale and Spain’s raising of its budget-deficit forecasts.

The cost of insuring against the default of sovereign debt from Greece, Portugal and Spain soared to new highs, and the euro slid to an eight-month low against the dollar and lost 3% of its value against the Japanese yen.

Many are beginning to worry that Greece could be the next “subprime”—referring to a debt situation that appears initially to be contained but that quickly spreads. It also focuses attention on the massive amounts of debt racked up by governments around the globe, including the U.S.

Apparently, the combination of Japan’s aging population coupled with out-of-control deficit spending has not convinced die-hard European Keynesians to consider alternative economic policies.  They have no fear of the bust after the spending-fueled boom.  Still,we have cause for hope since

expectations are that countries like Greece will ultimately not default and instead be bailed out by Germany and other healthier economies in the European Union, the decline in the euro reflects that investors are electing to take what they see as the less risky route.  They pulled money out of Europe and parked it in the relative safety of the dollar, yen and short-term government debt in Japan and the U.S., putting downward pressure on the euro.

At least there are still plenty of safe harbors.

…

places like Belgium and Austria also came under pressure, traders say. In addition, European banks, which are major holders of government debt, saw their share prices take big hits.”We’ve definitely entered the stage where the European debt crisis is becoming systemic,” says Barry Knapp, equity market strategist at Barclays Capital in New York.

Officials at the U.S. Treasury Department and Federal Reserve have been watching developments in Greece closely, and have seen the problems largely as a regional issue that European governments can handle. If markets continue to sink globally, that could shift the thinking….

Praise Allah for all those incomprehensibly smart financiers watching out for us.  As long as it’s only a regional problem in Europe, there shouldn’t be any problems for the United States.

In the past, the countries could respond to such crises by devaluing their currencies—an option not on the table for members of the 16-member euro zone.

The austerity measures that the governments are being forced to pursue will likely only worsen their already high unemployment and thwart economic growth in the medium term.

Moreover, as the problem spreads, it becomes that much more difficult to manage. Spain, for example, is the euro zone’s fourth-largest economy and nearly twice as big as Greece, Portugal and Ireland combined. That likely makes it simply too big to undertake the kind of bailout that Germany and other euro-zone countries have privately been contemplating for Greece.

By “manage” do we mean cover-up by reorganize?  Didn’t that kind of fancy accounting mess up Enron?   Wait, what?  Oh, different rules apply to sovereigns.    Still, isn’t there a limit to how far a government can go in devaluing its currency?  Maybe, but after a while, the unemployment numbers go down when those workers just drop off the grid.  So on paper, it’s a recovery,…they call it a “European-style” recovery.  Those Old Worlders are just so trendy but at least the U.S. is starting to catch on to that trend.  It’s just a matter of waiting it out.  Just make sure you can provide sustenance for those former workers.  The net positive is that there’s job creation in expanding the bureaucracy to take care of those people!

Even in crisis, there are opportunities.  Credit Default swaps, anyone?

Thursday’s frenzy was whipped up in part by big moves in the credit-default swap markets, where traders can take big bets on the likelihood of a country defaulting.

As credit-default swaps on debt of Greece and Portugal soared, indicating more worries about a default, investors became more alarmed. That often sets off a cycle of more CDS buying. Prices of government bonds issued by Spain and Portugal sank along with their stock markets, while the cost to insure these bonds against default using credit-default swaps soared.

In a worrisome sign, concerns about the fiscal woes of European governments are starting to infect corners of the credit markets that European banks and companies rely on to raise money.

Prices of credit-default swaps tied to European companies with stronger credit ratings, including banks, also rose on Thursday, with the cost of insuring the debt of Spanish and Portuguese banks jumping in particular.

Even banks like the U.K.’s Barclays PLC and Germany’s Deutsche Bank AG saw their debt-default insurance costs rise.

As if the $1 quadrillion “Planet X” swirling around the financial planet Earth couldn’t get any bigger.  Oh, well…it’s time to turn to simpler pleasures.  Gearing up to deliver a hard smackdown on my wife, this Sunday, I have one question: Saints or Colts?