Tag Archives: debt
Which Central Bank Wants to Be a Trillionaire? Twelve-Zero Coin Signals US Economy’s Stretch into Infinity
For many years, the subject of the national debt of the United States had more percipient commentators wonder – sometimes even aloud – whether they actually know anything about anything. How can what is nominally the world’s most powerful country run an exponentially-increasing deficit that is public knowledge – indeed, prominently displayed on a dedicated clock (which, ironically, has run out of digits) in New York City’s Times Square – and yet not experience a proportionate decrease in domains such as international prestige or perceived credit-worthiness?
Recent years, however, have seen the formerly invincible one-time ‘hyperpower’ begin to resemble an all-too-human entity: the summer of 2011 saw the United States flirt with outright default, with China’s Xinhua news agency giving the US government a very public dressing-down; towards the end of 2012, the term ‘fiscal cliff’ entered the global public’s consciousness in an unforgettable manner. Now, with the American administration once again engaged in the governmental equivalent of rummaging round the back of the sofa for a bit of spare change – a fiscal ‘Valentine’s Day Massacre’ looks to be on the cards – a proposal has been floated for the US Treasury to create a trillion dollar (US$1,000,000,000,000.00) platinum coin and deposit it with the Federal Reserve in exchange for the same value of loans.
Technically, the coin would be issued as a commemorative one, a process permitted by a hitherto obscure 1997 law – and therefore an ingenious stratagem to circumvent the need for the United States Congress to agree to an additional trillion dollars of debt. But while a wonderfully convenient method for the executive to get their paws on a pile of ‘free’ cash, we at Mediolana have some doubts as to whether this is a viable path:
1. Democracy? The idea that the US Treasury could bypass the elected Congress in such a brazen fashion does nothing to augment already-tarnished American claims to be a democratic exemplar.
2. A Bad Impression. Creating a trillion dollars out of thin air by coin seignorage is, to put it mildly, on the desperate side; that it is being seriously contemplated gives the watching world the perception of a country which is running out of viable ideas faster than most would wish to accept.
3. A Concerning Pattern. The United States seems to be lurching from one financing crisis to another with increasing frequency, with not even close to one quarter having passed since the sighting of the ‘fiscal cliff’. How its creditors react to this trend may well define the present epoch.
The September 2012 issue of the redoubtable World Soccer – a publication that is, with every new edition, increasingly resembling the Economist – contains a fine feature on the very different fortunes of two Qatari-owned European football clubs, France’s Paris Saint-Germain (‘PSG’) and Spain’s Málaga Club de Fútbol (‘Málaga CF’). Two Sides of the Same Coin, co-authored by Howard Johnson and the excellent Sid Lowe, illustrates in some detail how petrodollars are transforming PSG into the elite club that – aside from brief periods in the 1980s and 1990s when the likes of Safet Sušić, George Weah and Leonardo Nascimento de Araújo sported the iconic Parisian red-blue – it has never really been; the same sudden withdrawal of natural gas cash from the Málaga CF coffers is threatening to render that club just another minor footnote in the history of association football.
Reading the section on Málaga CF, however, we were left with a sense of unease: the sudden disappearance of owner Sheikh Abdullah bin Nasser Al Thani – the Qatari royal who has apparently pulled the plug on the Andalucian Dream – was treated as a little too surprising, with explanations of varying persuasiveness (including Al Thani’s failure to procure a licence for a massive construction project at Málaga port) proposed for his withdrawal.
Indeed, while the specific reason(s) for Al Thani’s apparent de facto departure from Málaga CF are seemingly yet to be revealed, there is no shortage of very concrete reasons for anyone in his position to abandon ship:
1. The Duopoly. Arguably more than at any time in the history of La Liga, Real Madrid Club de Fútbol (‘Real Madrid’) and Futbol Club Barcelona (‘Barcelona’) have realised a duopoly of the winners’ podium, with no other club having their name engraved on the league trophy since Valencia Club de Fútbol in 2004. While gaining entry to the UEFA Champions League has been relatively straightforward for Málaga CF, it has nevertheless involved Al Thani sinking c.£120m into the club; to seriously threaten Real Madrid and Barcelona may require a figure in the billions of euros in transfers, salaries and stadium construction costs.
2. Ruination. A likely recent realisation of the invisible Qatari is that there is no real economic case for Spanish football as it is currently constituted: with combined debts to the tune of around €1.5bn, Real Madrid and Barcelona owe their continued existence to political reasons rather than business ones. Presumably without a local financial institution to bail his club out in the event of insolvency, Al Thani may well have thought better of trying to compete on this absurdly uneven and unsustainable playing field.
3. The End of Spain? When Al Thani purchased Málaga CF in June 2010, it could conceivably have looked to some like a reasonable project: the purchase of a relatively cheap asset which could be augmented and transmogrified over time into the number one club in the south of Spain. However, with the job-free Spanish economy now heading beyond all reasonable doubt into a state of implosion, it no longer makes any sense to throw money at an entity which is likely to decline in value – perhaps to an alarming degree – in the context of a centre-periphery conflict which may even see the end of the Kingdom of Spain in its current form. If the Gulf plenipotentiary is cashing in his chips, could anyone really blame him?
The 1990s in Japan is now known worldwide as a ‘lost decade‘ (‘Ushinawareta Jūnen‘) for what was at the time the world’s second largest economy – and the biggest creditor of the global hyperpower, the United States. A collapsing asset bubble led to a crash in the stock market; the ensuing debts that had been run up during the era of gold leaf sushi turned bad, and the Japanese have been struggling to rid themselves of the shadow of indebtedness which has throttled economic growth in the Land of the Rising Sun ever since.
So what exactly is one to make of this recent graph - produced by Haver Analytics for Morgan Stanley, the global financial services firm headquartered at 1585 Broadway in New York City - comparing debt levels across a range of advanced economies?
As can be seen from the graphical representation, Japan’s debt – a huge percentage of its GDP – is nevertheless dwarfed by that of the United Kingdom: weighing in at just shy of 1,000% of the nation’s gross domestic product, it is literally peerless in the context of the great global debt game; intriguingly, a huge chunk of the UK’s liabilities are not government debts, but obligations owed by the financial sector. At the other end of the spectrum, nations such as Canada, Australia and New Zealand enjoy relatively less alarming positions, with Australia’s low level of government debt particularly enviable.
After some contemplation, we at Mediolana have reached the following conclusions from this sobering data:
1. A Lost Generation? The idea that the United Kingdom could be facing anything other than – at the very least – a lost decade must now be consigned to the designer recycle bin of history. The absolute level of debt that exists within the economy means that nothing other than economic collapse is possible, though whether it is gradual or sudden is yet to be determined. The fact that the United Kingdom of today does not possess anything like Japan’s scientific clout of the 1990s – nor its world class brands - means that there is no equivalent cushion to keep the economy ticking over, either; a lost generation, rather than a lost decade, may be the country’s fate.
2. Who Pays? The green part of the UK debt bar – constituting around two-thirds of the obligations – are those owed by the City of London and its relevant associates. Ordinarily, this would be a bad scenario – the collapse of banks and financial institutions more generally is hardly pleasant – but within the specific context of the United Kingdom, this state of affairs could prove catastrophic. The reason is that even since the onset of the present financial crisis, the Chancellor of the Exchequer – regardless of political hue – has not hesitated to write out cheque after cheque in an attempt to restore the banking sector to health; if this policy is continued, the United Kingdom could end up following the Japanese example of bailing out zombie institutions to the point of general economic implosion.
3. The Recapitalisation of Capitalism. It is clear that even allowing for the nerve-wracking examples of the UK and Japan, the developed world in general is still far, far too dependent on debt – as opposed to savings – for its day-to-day economic functioning. From Scandinavia to North America, easy borrowing, rather than fiscal discipline, is the norm. Capitalism cannot work sustainably under such conditions: the only result will be debt cycles of ever-increasing velocity. There is much soul-searching to do both in the corridors of power and amongst ordinary citizens.
From time to time, we at Mediolana get posed the seemingly eternal question: whither the economy? Sometimes the best course of action is to point the questioner in the direction of the ostensibly omnipresent Nouriel Roubini, that stalwart of the Stern School of Business at New York University and, like this company’s chief blogger, one of the very few commentators to note – during the ‘perpetual boom’ years of the mid-2000s – that all was not well with the global economy. Professor Roubini has recently composed a masterful analysis for Al Jazeera – one evincing his usual, tight prose – entitled Is capitalism doomed?
Roubini believes that ‘Great Depression 2.0′ may well be upon us shortly owing to a number of factors, including high oil prices and the psychological, ecological and physical devastation afflicting Japan. But the leitmotiv of his article is the central paradox confronting Western economies: the United States, the eurozone and the United Kingdom are all not merely experiencing slow or negative growth, but are seemingly bankrupt in terms of policy prescriptions; in Roubini’s words, ‘[Western policymakers] have run out of rabbits’. Particularly sobering in this respect is the fact that the American administration’s combination of a second round of quantitative easing and US$1trn in tax cuts – a desperate card to play in virtually any context – did not produce any significant economy-wide gains in the United States.
Extrapolating from Roubini’s perspicacity, Mediolana would proffer the following thoughts on the general direction of the global economy:
1. Western Stagnation. At least in the medium-term, the structural economic problems in the West are unlikely to be solved anytime soon. The eurozone crisis could conceivably dominate the EU for the first half of the current decade and beyond, and should Italy or Spain need bailing out then all bets are off concerning the ultimate status of the euro itself. The United States looks to be in an even worse predicament, with its transformation from hyperpower to fading world power well underway. In both regions, the awesome levels of debt now in play threaten to choke off any return to economic growth as we know it; sovereign governments are essentially being used as guarantors of the debts of the financial sector, leading one to question what form of capitalism is actually being practiced here.
2. Eastern Promise. Fast-emerging economies such as China, India, Turkey and Indonesia are posting hugely impressive growth rates – all four of these countries are scheduled to enjoy GDP growth of between approximately 6% and 10% this year – and have remained at least relatively immune from the contagion sweeping the EU and the United States, despite having intimate trade ties with these regions. This may change as the financial crisis in the West deepens, but emerging economies such as these boast massive potential for development of their own internal markets – a significant trump card in a period of pronounced global instability.
As anyone who has had the pleasure of witnessing their recent performances in both La Liga and the Copa Del Rey can attest to, FC Barcelona – winners of a record six competitions in 2009, including the Champions League and FIFA Club World Cup – are on the verge of attaining footballing nirvana, with the diminutive front three of Lionel Messi, David Villa and Pedro Rodriguez producing interplay worthy of exhibition space at the Guggenheim. Meanwhile, Barcelona’s eternal rivals Real Madrid have assembled a team whose glittering cast includes two of the best attacking talents in the world: Cristiano Ronaldo and Mesut Ozil. Both teams will resume European competition this spring with high hopes of becoming champions of Europe.
However, there is a spectre haunting the plutocrats of Spanish football: that of astronomical – and perhaps unserviceable – debt. Barcelona’s success – for all the column inches that their much-vaunted youth program has generated – has come at a tremendous financial cost, with a July 2010 audit by Deloitte revealing a total debt of €442m. Barca recently announced a c.€170m, five year sponsorship deal with the Qatar Foundation, a non-profit arm of the natural gas superpower, but even this will not be enough to come close to wiping out its arrears. Real Madrid, by one generous calculation, were estimated to be in the red to the tune of €327m in September 2009; this figure could in fact represent as little as just over half the actual monies due to creditors.
Much of this debt has been made possible by the cosy relationships the clubs enjoy with their respective local banking communities. Barcelona’s credit line runs through Catalan banks, while Real’s comes via the Castilian financial industry with which their current president, construction magnate Florentino Perez, has strong links. In better economic times, loans made to pay transfer fees and footballers’ salaries may have raised eyebrows, but with Spain’s banking system facing $240bn of so-called ‘problematic exposure’ to the property and construction industries and the country’s looming debt crisis regarded by many as the next big tsunami to hit world markets, fans of Barcelona and Real Madrid may be well-advised to presently relish what could come to be seen as a golden, pre-austerity era.