Disaster Coming Our Way?

Newsweek Magazine

Professor Niall Ferguson
Europe’s Disaster Is Headed Our Way
Nov 13, 2011 12:00 AM EST

Can America withstand the death spiral of debt?
As an author who has just published a book on the crisis of Western civilization, I couldn’t really have asked for more: simultaneous crises in Athens and Rome, the cradles of the West’s law, languages, politics, and philosophy.

Yet most Americans are baffled by the ongoing economic pandemonium in the European Union. For them, places like Greece and Italy are primarily tourist destinations they’ll visit at most once. The finer points of Mediterranean politics leave them cold, except insofar as they’re funny. After all, who could resist the opera-buffa character of Silvio “Bunga-Bunga” Berlusconi?

But only a few weirdos really feel their pulses quicken when they hear news like: the new Greek prime minister is a former central banker called Papademos! Ever tried to explain to a New Yorker the finer points of Slovakian coalition politics? I have. He almost needed an adrenaline shot to come out of the coma.

So why should Americans care about any of this? The first reason is that, with American consumers still in the doldrums of deleveraging, the United States badly needs buoyant exports if its economy is to grow at anything other than a miserably low rate. And despite all the hype about trade with the Chinese, U.S. exports to the European Union are nearly three times larger than to China.

Until March, it seemed as if exports to Europe were on an upward trajectory. But the eurozone crisis has stopped that. Governments that ran up excessive debts have seen their borrowing costs explode. Unable to devalue their currencies, they’ve been forced to adopt austerity measures—cutting spending or hiking taxes—in a vain effort to reduce their deficits. The result has been Depression economics: shrinking economies and unemployment rates approaching 20 percent.

As a result, according to the new president of the European Central Bank, Mario Draghi, a “double dip” recession in Europe is now all but inevitable. And that’s lousy news for U.S. exporters targeting the EU market.
But there’s more. Europe’s problem is not just that governments are overborrowed. There are an unknown number of European banks that are effectively insolvent if their holdings of government bonds are “marked to market”—in other words, valued at their current rock-bottom market prices. In our interconnected financial world, it would be very odd indeed if no U.S. institutions were affected by this. Just as European institutions once loaded up on assets backed with subprime U.S. mortgages, so most big U.S. banks have at least some exposure to eurozone bonds or banks. One institution—MF Global, run by former Goldman Sachs CEO Jon Corzine—just blew up because of its highly levered euro bets. Others are biting their fingernails because it is suddenly far from clear that the credit default swaps they have bought as insurance against, say, a Greek default are worth the paper they are written on.

But the third reason Americans should care about Europe is more important even than the risk of a renewed financial crisis. It is the danger that what is happening in Europe today could ultimately happen here. Just a few months ago, almost nobody was worried about Italy’s vast debt, which amounts to 121 percent of GDP. Then suddenly panic set in, and Italy’s borrowing costs exploded from 3.5 percent to 7.5 percent.

Today the U.S. gross federal debt stands at around 100 percent of GDP. Four years ago it was 62 percent. By 2016 the International Monetary Fund forecasts it will be 115 percent. Economists who should know better insist that this is not a problem because, unlike Italy, the United States can print its own money at will. All that means is that the U.S. reserves the right to inflate or depreciate away its debt. If I were a foreign investor—and half the debt in public hands is held by foreigners—I would not find that terribly reassuring. At some point I might demand some compensation for that risk in the form of ... higher rates.

Athens, Rome, Washington ... The shortest route from imperial capital to tourist destination is precisely this death spiral of debt.
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Niall Ferguson is a professor of history at Harvard University and a professor of business administration at Harvard Business School. He is also a senior research fellow at Jesus College, Oxford University, and a senior fellow at the Hoover Institution, Stanford University. His Latest book, Civilization: The West and the Rest, will be published in November.

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Is America in decline, or about ready to move to the next level?

Every contrarian bone I have in my body tells me that America is about ready to enter a new era of worldwide expansion on a grand scale, considerably necessitated by self-interest and quite possibly as a pre-requisite to behind the scenes political and diplomatic demand from those nations who fear current rising great powers who do not aspire to their cultural goals and ideals.

However, as noted in many publications, newscasts, university lectures, etc., America seems to be riding the path to insignificance that has plagued many other regional and world powers in the past, including the Greeks, Romans, Chinese (who are supposedly ready to take over), Byzantinians, and the English/British, to name a few.

Notwithstanding the negative 'press' concerning Americas certain decline, my thinking is inspired by many sources, including investment strategy used by many of the most successful money moguls on the planet. An example of this ideology can be illustrated by paraphrasing the investment doctrine of the great Warren Buffet, the worlds premier buyer and seller of everything, as he elaborates on the above mentioned contrarian ideology by stating, 'You pay a very high price in the stock market for a cheery consensus', and this would tell me that the opposite must also be true in that the current global morosity concerning America is evidence that it is ready to soar. 

Your thoughts would be very much appreciated, Anson
References:

http://www.investopedia.com/articles/financial-theory/08/contrarian-investing.asp

The Modern Scholar: The Tiber and the Potomac: Rome, America, and Empires of Trust
Thomas F. Madden

http://www.economist.com/blogs/freeexchange/2010/01/roots_american_dominance

http://www.guardian.co.uk/commentisfree/2008/sep/28/usforeignpolicy.useconomicgrowth

http://blogs.telegraph.co.uk/news/alexspillius/9363517/Obama_signals_the_end_of_American_dominance/