The Euro vs. the United States: Debt Woes

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Last summer the PIIGS – an acronym for Portugal, Ireland, Italy, Greece and Spain – were having sovereign debt issues. First we heard about Greece and Ireland, followed by Portugal and next on the block could be Italy and Spain. At the Graduate Schools of Banking, my comment was that similar debt issues and subsequent budget cuts and social upheaval that prevailed in these countries could occur in the U.S.

As we fast-forward to spring 2011, similar issues are occurring in state capitals of Madison, WI, and Columbus, OH. In Greece, Ireland and Portugal, government spending is being cut. Wages and pensions are being reduced. There is a lesson to learn from the EU: If you allow debts to continue out-of-control year after year, efforts to reverse the changes have a very good chance of placing the country into financial difficulty and, eventually, failure.

The EU budget deficits are about 4.6% of GDP on average, which is about half of the deficit of U.S. and Japan, as a percent of GDP. The Euro Zone has at least admitted that spending more than you earn is unsustainable. This is definitely not true for the U.S.

Let’s examine the painful and graphic evidence building in the U.S. U.S. spending is growing from painful to obscene. The net deficit was $1.3 trillion last year, and cash flow has been negative for nine consecutive years, totaling $4.8 trillion. U.S. net worth is negative $44 trillion given the unfunded liabilities of Social Security and Medicare over the next 75 years. Unfunded Medicare and Medicaid is equivalent to 21% of the budget.

The U.S. has done very little to close the gap between revenue and expenses. Excessive debt and unsustainable spending usually has difficult consequences. For examples, remember New York City in 1975, Argentina in 2001, and Greece in 2010. While many in the U.S. are amused at the Euro debt zone problems, it is prudent to consider that the U.S. may be headed for a predictable surprise that could get ugly here. The eventual results are to print money, reduce purchasing power, default on debt or have an extended period of sub-par growth.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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