Friday, June 11, 2010

The Debts of the World: Where Do We Grow From Here? Part II

A history of US federal interventions (bailouts):

A) Late 1970s - US bails out municipal bonds by guaranteeing state and some local (NYC) bonds.

B) Early- Mid 1980s - US bails out third world nations and Latin America via Brady Bonds.

C) 1989 - US bails out commercial real estate via the Resolution Trust Corporation

D) 1997-1998 - US bails out emerging markets in Asia via IMF.

E) 2008 - US bails out investment banks (except Lehman Bros) via TARP and sovereigns holding housing finance agency bonds (Fannie and Freddie Mac).

F) 2009 - US bails out municipal bonds (again) by underwriting the Build America Bonds (BAB) which covers interest payments for the states.

G) 2010 - US pressures EU to bail out itself while granting hundreds of billions dollars in currency swap guarantees

Notice a pattern here?

The current crisis is not materially different from past crises (except in the scale). America's net worth is TRILLIONS of dollars. We are the world's biggest consumer and driving engine. A few trillion here and there will not destroy us.

The formation of the EU itself would not have been possible without America's help. A continent that had been at war with itself for hundreds of years has endured 60 years of peace because of a US taxpayer funded NATO. European nations that were used to, on average, one war every generation suddenly found quiet. Even the Balkan conflict in the 1990s has been (largely) resolved through American military power.

Debt is fine as long as there is productivity growth behind it. The EU's formation was supposed to usher in a period of productivity. Instead, it produced a stagnant continent that has grown used to some of the highest living standards in the world. But how can governments pay for it?

Let's look at productivity gains. Growth from the last generation of innovative American companies (there is a distinct lack of start-ups in Europe due to business cultures and government tax regulations - Indeed, the tax burdens behind the EU bailout will stifle growth even more.) is falling.

The Microsofts, Dells, and Intels of the 1980s and 1990s have turned into moribund mega-corporations with smaller profit margins. Generally, past innovations are already factored into equity share prices. Maintaining the past pace of productivity will be difficult. Which is why the world is looking to the India's, Brazil's, and China's for the next big gains.

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