Thought this an interesting article from WSJ--
When the Global Debt Shuffle Hits Home
It took the Dow Jones Industrial Average 62 long, grinding years to close above 582.69 for the first time. On Thursday, the Dow plunged by 582.69 points in less than 420 seconds.
The market's terrifying drop was more than a technical trading glitch. It was a warning that the U.S. economy is playing a dangerous game. After all the massive bailouts, the federal debt is exploding.
Overall U.S. government debt now stands at 92.6% of projected 2010 gross domestic product, according to the International Monetary Fund.
<CITE>Christophe Vorlett</CITE>
The U.S. now has a heavier debt burden than several of the overleveraged countries that have been branded with the scornful nickname "the PIIGS." Portugal's debt, according to the IMF, is 85.9% of its GDP; Ireland's, 78.8%; Italy, 118.6%; Greece, 124.1%; Spain, 66.9%. Perhaps there should be a new acronym, with the U.S. added to Portugal, Ireland, Italy, Greece and Spain: "PIG IS U.S."
But joining this club is no joke. Economists Carmen Reinhart and Kenneth Rogoff, authors of "This Time Is Different: Eight Centuries of Financial Folly," have shown that a rise in government debt above 90% is associated with a decline in economic growth of roughly one percentage point per year.
Yes, in recent months, there's been a lot of bullish talk about how the American balance sheet has been cleaned up. Total consumer debts, according to the Federal Reserve, have dropped by $160 billion since the third quarter of 2008, while total business debt is down by more than $150 billion. And banks and other financial institutions owe $1.4 trillion less than they did in late 2008.
Those debts haven't disappeared. They have merely been shifted onto the books of the federal government?in what may be the highest-stakes shell game ever. On Sept. 30, 2008, total U.S. public debt stood at $5.8 trillion. By the end of 2009, it had surpassed $7.8 trillion. So far this year, it has swollen by an additional 8%; total U.S. public debt outstanding now exceeds $8.4 trillion.
There's no sign of a slowdown in debt growth. "These processes are not linear," warns Prof. Reinhart. "You can increase debt for a while and nothing happens. Then you hit the wall, and?bang!?what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big." The results can unfold in a cascade of what Prof. Reinhart has called "the deadly Ds": downturns, deficits, more debt, downgrades, even default.
The U.S. has advantages many of the PIIGS lack. Our economy is far more diversified, and the Treasury finances much of its debt domestically, making us less vulnerable to the whims of foreign investors.
But, adds Prof. Reinhart, "we cannot take for granted that these things happen only in places like Greece but can't happen here. If you flood the markets with more and more debt, its value is going to go down. We are silly to fool ourselves into believing otherwise."
And, of course, just as companies with too much debt are more vulnerable to any outside shock, so are countries. In 1989, the great investor Sir John Templeton told me something that has rung in my ears ever since, this week more than ever: "Those who spend too much will eventually be owned by those who are thrifty."
What, then, should you do to protect yourself? Because of the debt buildup, the risks of an economic slowdown and a recurrence of inflation down the road are very real. But in my view, the obvious tools?gold and other commodities, emerging-markets stocks, inflation-protected bonds?are already so popular that they are likely overpriced.
If you are aggressive, you might start looking at European stocks. The MSCI EMU index, which tracks major companies in the "euro zone," has lost an annual average of 19% over the past three years. Major companies like Nestl?, Philips and Unilever are getting cheaper by the day, especially compared with their U.S. peers. There's no rush; you shouldn't imagine you can buy at the exact bottom.
If you just want to fortify your portfolio, wait for an economic slowdown, when the people who have been barging into gold and commodities, emerging markets and inflation-protected bonds will come stampeding back out of them. Then you can buy at lower prices that will afford you some real protection. For most investors, at least for the time being, the best thing to do is wring your hands while sitting on them.
When the Global Debt Shuffle Hits Home
It took the Dow Jones Industrial Average 62 long, grinding years to close above 582.69 for the first time. On Thursday, the Dow plunged by 582.69 points in less than 420 seconds.
The market's terrifying drop was more than a technical trading glitch. It was a warning that the U.S. economy is playing a dangerous game. After all the massive bailouts, the federal debt is exploding.
Overall U.S. government debt now stands at 92.6% of projected 2010 gross domestic product, according to the International Monetary Fund.
The U.S. now has a heavier debt burden than several of the overleveraged countries that have been branded with the scornful nickname "the PIIGS." Portugal's debt, according to the IMF, is 85.9% of its GDP; Ireland's, 78.8%; Italy, 118.6%; Greece, 124.1%; Spain, 66.9%. Perhaps there should be a new acronym, with the U.S. added to Portugal, Ireland, Italy, Greece and Spain: "PIG IS U.S."
But joining this club is no joke. Economists Carmen Reinhart and Kenneth Rogoff, authors of "This Time Is Different: Eight Centuries of Financial Folly," have shown that a rise in government debt above 90% is associated with a decline in economic growth of roughly one percentage point per year.
Yes, in recent months, there's been a lot of bullish talk about how the American balance sheet has been cleaned up. Total consumer debts, according to the Federal Reserve, have dropped by $160 billion since the third quarter of 2008, while total business debt is down by more than $150 billion. And banks and other financial institutions owe $1.4 trillion less than they did in late 2008.
Those debts haven't disappeared. They have merely been shifted onto the books of the federal government?in what may be the highest-stakes shell game ever. On Sept. 30, 2008, total U.S. public debt stood at $5.8 trillion. By the end of 2009, it had surpassed $7.8 trillion. So far this year, it has swollen by an additional 8%; total U.S. public debt outstanding now exceeds $8.4 trillion.
There's no sign of a slowdown in debt growth. "These processes are not linear," warns Prof. Reinhart. "You can increase debt for a while and nothing happens. Then you hit the wall, and?bang!?what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big." The results can unfold in a cascade of what Prof. Reinhart has called "the deadly Ds": downturns, deficits, more debt, downgrades, even default.
The U.S. has advantages many of the PIIGS lack. Our economy is far more diversified, and the Treasury finances much of its debt domestically, making us less vulnerable to the whims of foreign investors.
But, adds Prof. Reinhart, "we cannot take for granted that these things happen only in places like Greece but can't happen here. If you flood the markets with more and more debt, its value is going to go down. We are silly to fool ourselves into believing otherwise."
And, of course, just as companies with too much debt are more vulnerable to any outside shock, so are countries. In 1989, the great investor Sir John Templeton told me something that has rung in my ears ever since, this week more than ever: "Those who spend too much will eventually be owned by those who are thrifty."
What, then, should you do to protect yourself? Because of the debt buildup, the risks of an economic slowdown and a recurrence of inflation down the road are very real. But in my view, the obvious tools?gold and other commodities, emerging-markets stocks, inflation-protected bonds?are already so popular that they are likely overpriced.
If you are aggressive, you might start looking at European stocks. The MSCI EMU index, which tracks major companies in the "euro zone," has lost an annual average of 19% over the past three years. Major companies like Nestl?, Philips and Unilever are getting cheaper by the day, especially compared with their U.S. peers. There's no rush; you shouldn't imagine you can buy at the exact bottom.
If you just want to fortify your portfolio, wait for an economic slowdown, when the people who have been barging into gold and commodities, emerging markets and inflation-protected bonds will come stampeding back out of them. Then you can buy at lower prices that will afford you some real protection. For most investors, at least for the time being, the best thing to do is wring your hands while sitting on them.
