Europe's worsening debt crisis--notably Italy's--should serve as a warning to the United States of what can happen to an otherwise steady, solvent economy whose debt is too high. In short, when debt gets so precariously high that interest payments become a very large budget line, debt markets can expand a slight decrease of confidence into a significant increase in interest rates. From there, the crisis can quickly descend into a national failure to refinance expiring bonds, and then possibly into national bankruptcy and default.
To the Shores of Tripoli – With President Obama on vacation and Congress in recess, most eyes are turned away from Washington and towards developments overseas. The Middle East is being closely watched with a strongman in Libya on the verge of falling and another in Syria involved in bloody fighting to stay in power. But Europe also is worthy of attention with the debt crisis there compelling leaders to discuss major fiscal and economic policy changes.
Over at Ezra Klein's blog, Sarah Kliff writes about the "Maple Leaf Miracle," or how Canada was able to turn itself around after it was downgraded.
A recent report from the Associated Press Global Economy Tracker found that the U.S. national debt (as a percentage of GDP) is the fifth largest among the world's major economies. According to the Tracker, which analyzes financial and economic data from thirty of the world's largest economies, U.S. debt in the first three months of the year equaled 95 percent of GDP.
Megan McArdle at The Atlantic writes about what happens if China stops buying U.S. Treasury bonds. She points out that a fiscal crisis is unlikely to be foreshadowed by signs such as a gradual rise in interest rates or other countries merely slowing down lending. Rather, citing the studies of Carmen Reinhart, she argues that changes would be much more precipitous.
Students at Stanford University, under the guidance of Comeback America Initiative (CAI) CEO and CRFB board member David Walker, have developed a Sovereign Fiscal Responsibility Index (SFRI) in an attempt to compare the quality of fiscal policy across different countries. The study, unsurpringly, does not contain good news for the US.
Markets so far this week have reacted to mixed news on the growth front in the US plus new concerns on inflation. As things start to wind up for the weekend, traders are also nervously watching news from various parts of the world.
Markets in the U.S. and elsewhere have focused on signs that the U.S. economy continues to recover, although still at a very gradual pace. January’s payroll employment data and updated benchmarking for 2010 indicate that job creation remains very sluggish, even adjusting for possible weather-related effects which may have held down jobs numbers.
In what is sure to be a wake-up call for the Japanese government, Standard & Poor’s cut Japan’s credit rating today for the first time in nine years. Japan, whose credit rating was downgraded from AA to AA-, faces a debt of 943 trillion yen ($11 trillion) - more than double of their annual economic output.