The date for the death of Herod the Great is usually thought to be 4 B.C. This is based on a chronology provided by the Jewish historian Josephus, who was usually accurate about such things and wrote in great detail about Herod's life. It is possible to use a chronology provided by Josephus and arrive at a date of 4 B.C. for Herod's death. In fact I would suggest that Josephus, writing about 100 years after Herod, thought Herod died in 4 B.C. However, other information provided by Josephus makes the 4 B.C. date implausible. I think 1 B.C. is the more likely date. This affects estimates for the date of the birth of Jesus, who was born before Herod died.
Josephus describes a series of events leading to Herod's death. On a day when Herod has a man named Mathias killed and appoints a new high priest, Josephus says "And that very night there was an eclipse of the moon." [Josephus: Antiquities 17:6:4] A sequence of events then leads up to Herod's death, which is followed shortly afterwards by a Passover. Eclipses make excellent dating markers, because today we can know precisely when they occurred, even in the distant past. The standard understanding is that this was the eclipse of March 13, 4 B.C. Passover was exactly one month later. Lunar eclipses occur only during full moons, and Passover is also always on a full moon. (For a tool to see when past eclipses occurred, see http://eclipse.gsfc.nasa.gov/JLEX/JLEX-AS.html, set the city to Jerusalem and dial in the century before Christ. Because there was no year 0 B.C., in this tool the year 0 is 1 B.C., -1 is 2 B.C., etc.) Using the eclipse described by Josephus, there are three problems with a 4 B.C. date - a minor problem, a major problem, and an enormous problem.
The minor problem with identifying the 4 B.C eclipse as the one mentioned by Josephus is that it wasn't much of an eclipse. The 4 B.C. eclipse was only a partial eclipse, it did not begin until after midnight (12:03 a.m) Jerusalem time, and at its maximum extent it covered less than half of the moon. As astronomical events go, this was a minor event that would not be widely noticed, and it would seem surprising to find it noted by a historian - it is the only eclipse Josephus mentions in all his writings.
The major problem is that there was exactly one lunar month between the eclipse and Passover. During that time Josephus says the following things happened. I have placed next to these events what I think would be a minimum time duration for each.
1. Herod slowly got sick with worms and sent for physicians (2 days) [Antiquities 17:6:5]
2. At his physicians' recommendation, he traveled to a warm bath spot beyond the Jordan to bathe (2 days)
3. He got sicker and returned to Jericho. He now believes he will die (2 days)
4. He called to him all the leading men of the Jewish nation, and they came. He imprisons them, ordering that they be executed when he dies, so that men would mourn his death (4 days)
5. Herod receives from Rome a letter, Herod briefly revives and he orders Antipater killed (1 day) [Antiquities 17:7:1]
6. He makes numerous appointments, and five days after having Antipater killed, Herod dies (5 days) [Antiquities 17:8:1]
7. Salome and Alexas release the imprisoned officials, saying this was Herod's order, and then afterward announce that Herod has died (1 day) [Antiquities 17:8:2]
8. Herod's body is moved from Jericho to Herculaneum, where a very elaborate funeral for Herod is held and he was buried (2 days) [Antiquities 17:8:3]
9. Archelaus mourns for 7 days as prescribed by tradition (7 days) [Antiquities 17:8:4]
10. Archelaus goes up to the Temple and is installed as the new head of government, and greets the people (1 day)
11. Some Jewish leaders petition Archelaus to appoint a different high priest and punish some of Herod's friends (1 day)[Antiquities 17:9:1]
12. Archelaus sends many messengers to argue with the people about this, all of whom are badly received (3 days)
13. Passover approaches, and Archelaus has to break up a seditious group gathering ahead of the feast. During the feast of Passover itself, violence is extreme and 3000 men are killed. (2 days) [Antiquities 17:9:3]
The total days in this sequence is 33, which is longer than the one lunar month between the eclipse and Passover. Furthermore, the times I have listed for these events are minimums, and for some of them one would naturally assume they took much longer. The slow sickness and attempted treatment read as if they took longer than I have allowed, and there is no good reason to cram the letter from Rome, brief recovery, and execution of Antipater all into 1 day. Finally, the rebellion against Archelaus probably took much longer than the total of 6 days I have allowed. In conclusion, in 4 B.C., there was not enough time between the eclipse and the Passover.
And yet, there is still a bigger problem. The date for the 4 B.C. eclipse, March 3, fell on the Jewish holiday of Purim. The reason Josephus mentions the eclipse is to tie it to Herod's execution of 40 Jewish zealots who tore down statues of Roman eagles that Herod set up at the gate of the temple. It is unlikely that Herod was so politically tone-deaf as to execute Jewish patriots on the holiday that celebrates the fact that Jews were saved from execution in the days of Esther. Furthermore, Herod apparently convened a court to make the sentence, and it is more unlikely that a court would be convened on a holiday. Finally, Josephus says this happened on a Jewish "fast day" [Antiquities 17:6:3 and 17:6:4]. But Purim could not be a fast day - it was a feast day, a celebration day. The March 3 day must be wrong. This all could not have happened on Purim.
A better candidate eclipse is the eclipse of January 9, 1 B.C. This was a total eclipse beginning in Jerusalem at 10:26 p.m., with totality of the eclipse lasting for 79 minutes. In 1 B.C., Passover came three months later, allowing enough time for the events described in Josephus to occur. One can read Josephus online here, beginning with the passages I have cited: http://www.biblestudytools.com/history/flavius-josephus/antiquities-jews/book-17/chapter-6.html?p=3
Saturday, November 19, 2011
The Sovereign Debt Waterfall Part 3 - Over the Edge
It's hard to make predictions about the economy, because the economy is the sum of an enormous number of factors, not all of which can be known or understood. However, I think the idea that the United States is approaching the sovereign debt waterfall is a safer prediction than most. The reason is that the current in the river is so strong that it will overwhelm everything else that happens. In this metaphor, the river's current is the greater than $1 trillion annual deficit the United States is running, along with the difficulty of doing anything that can meaningfully reduce it. I still guesstimate that it will take a few years to get there, but on the timing of the prediction I have no confidence at all.
The U.S. funds its budget deficit with auctions of Treasury Bills and Bonds. These are government IOU's ranging from 3 months to 30 years. The buyer of a 3 month Treasury Bill is loaning the government money for 3 months. The interest rates are low, since the U.S. government is presumed to be a safe borrower - 3 month interest rates as of October 31, 2011 are 0.01%, 30 year interest rates are 3.25%, while 1 year, 2 year, 10 year, etc. rates are somewhere in between. The U.S. Treasury auctions this debt weekly usually on Tuesday, Wednesday and Thursday, and usually auctions about $60 billion a week. This is enough to cover the U.S. deficit, along with rolling over previous U.S. debt that comes due.
Interest rates typically rise or fall based on several factors, mostly expectations of inflation - investors want their money to earn more than the inflation rate. But when a country approaches the waterfall, the interest rates begin to rise for an entirely different reason - investors begin to fear that the country will not pay back its debt. This can be easily observed in Europe today, since all the countries in the European Union use the same currency, and a Euro is a Euro is a Euro; the value of the Euro and the inflation rate are the same for all Euro countries. A Euro in Greece buys the same amount of gold, or oil, or whatever as a Euro in Germany. However, German 10 year bonds, denominated in Euros, have an interest rate of a 1.7%, while Italian 10 year bonds, also denominated in Euros, are 6.1% (October 31, 2011 figures). The reason for the difference is that investors have a sneaking suspicion that Italy just might default on its debt, and the increased risk causes them to demand a higher interest rate. In March 2010, Greek bonds and German bonds had almost the same interest rate in the 3% range. Then Greece reached the edge of the waterfall and Greek interest rates rapidly shot to the moon, eventually going over 180%.
This is what I believe it will look like when the U.S. reaches the edge of the waterfall. In a very short period of time - just days or weeks - we will go from smooth sailing as far as interest rates are concerned to completely unmanageable. This is what happened to Greece. It will happen suddenly, because it will be triggered by a panic. We won't be able to undo the panic, because the panic will be for good reason. There are already people who invest in long term government bonds who do not expect the government to honor the debt many years from now, but instead believe they will be able to sell to someone else between now and then. When those people change their minds, they will try to sell and interest rates will shoot up. It is happening in slower motion in Europe, since the European Union is working on all kinds of plans, schemes and devices to try to bail out member countries, and some of the plans will work at least for a little while. The U.S. is too big for anyone to bail out.
When interest rates hit unmanageable levels, we are at the edge of the waterfall. No government, U.S., Greece, or anyone else, will sell its debt at rates like 50% or 100%, because if it did, interest rates would soon soak up all the money the government takes in. So at this time, business as usual, as we have done it for more than 80 years, will stop. What happens next depends on the government's decisions. Below I will describe what I think is the default case. This is what will happen if the government takes the least action, either out of choice, or a lack of will, or political gridlock.
The government can't issue debt any more, so the debt stops growing, deficit spending stops immediately. The government can't roll over its previous debt either, so we actually will start paying down the debt. This will give us what Charles called the "draconian Bachmann" solution on steroids. Without new debt, we will be able to service all existing debt (which will still have low interest rates). If we try to pay for all our entitlement programs, we will not have quite enough money to do it. We will then have zero money left over to fund all the rest of the government programs - no money for defense, NASA, pay for any government employees, etc. Of course that won't work, so we will figure out some way to cut entitlements and ongoing programs both and fund them both at low levels. The overall scope of the cutbacks will be much more than the $1 trillion annual deficits we currently run. This will plunge the economy into its worst short term downturn ever, as ripple effects of unemployment, etc. spread throughout. This will be a deflationary event. It won't last forever, but will last for several years and be enormously painful.
The paragraph above describes the default case, which is what happens if government doesn't do much. However, I suspect the government will find the above scenario intolerable and will inject itself vigorously into the process, changing the situation in ways that are less predictable. The government could decide not to honor its external debt. Can't you just hear it: "Why should our government pay China when it won't pay its own veterans?" This would allow more money to be used to fund ongoing operations, but would harm trade and hurt the value of savings accounts that include U.S. debt. The government could try to print money to fund its operations, although it would have to be done via real printing (you get your money in physical $20 dollar bills) rather than the current fractional lending approach won't work on the waterfall's edge. That could lead to hyperinflation. Or it could try something we haven't even though of. There is no painless solution, though.
The U.S. funds its budget deficit with auctions of Treasury Bills and Bonds. These are government IOU's ranging from 3 months to 30 years. The buyer of a 3 month Treasury Bill is loaning the government money for 3 months. The interest rates are low, since the U.S. government is presumed to be a safe borrower - 3 month interest rates as of October 31, 2011 are 0.01%, 30 year interest rates are 3.25%, while 1 year, 2 year, 10 year, etc. rates are somewhere in between. The U.S. Treasury auctions this debt weekly usually on Tuesday, Wednesday and Thursday, and usually auctions about $60 billion a week. This is enough to cover the U.S. deficit, along with rolling over previous U.S. debt that comes due.
Interest rates typically rise or fall based on several factors, mostly expectations of inflation - investors want their money to earn more than the inflation rate. But when a country approaches the waterfall, the interest rates begin to rise for an entirely different reason - investors begin to fear that the country will not pay back its debt. This can be easily observed in Europe today, since all the countries in the European Union use the same currency, and a Euro is a Euro is a Euro; the value of the Euro and the inflation rate are the same for all Euro countries. A Euro in Greece buys the same amount of gold, or oil, or whatever as a Euro in Germany. However, German 10 year bonds, denominated in Euros, have an interest rate of a 1.7%, while Italian 10 year bonds, also denominated in Euros, are 6.1% (October 31, 2011 figures). The reason for the difference is that investors have a sneaking suspicion that Italy just might default on its debt, and the increased risk causes them to demand a higher interest rate. In March 2010, Greek bonds and German bonds had almost the same interest rate in the 3% range. Then Greece reached the edge of the waterfall and Greek interest rates rapidly shot to the moon, eventually going over 180%.
This is what I believe it will look like when the U.S. reaches the edge of the waterfall. In a very short period of time - just days or weeks - we will go from smooth sailing as far as interest rates are concerned to completely unmanageable. This is what happened to Greece. It will happen suddenly, because it will be triggered by a panic. We won't be able to undo the panic, because the panic will be for good reason. There are already people who invest in long term government bonds who do not expect the government to honor the debt many years from now, but instead believe they will be able to sell to someone else between now and then. When those people change their minds, they will try to sell and interest rates will shoot up. It is happening in slower motion in Europe, since the European Union is working on all kinds of plans, schemes and devices to try to bail out member countries, and some of the plans will work at least for a little while. The U.S. is too big for anyone to bail out.
When interest rates hit unmanageable levels, we are at the edge of the waterfall. No government, U.S., Greece, or anyone else, will sell its debt at rates like 50% or 100%, because if it did, interest rates would soon soak up all the money the government takes in. So at this time, business as usual, as we have done it for more than 80 years, will stop. What happens next depends on the government's decisions. Below I will describe what I think is the default case. This is what will happen if the government takes the least action, either out of choice, or a lack of will, or political gridlock.
The government can't issue debt any more, so the debt stops growing, deficit spending stops immediately. The government can't roll over its previous debt either, so we actually will start paying down the debt. This will give us what Charles called the "draconian Bachmann" solution on steroids. Without new debt, we will be able to service all existing debt (which will still have low interest rates). If we try to pay for all our entitlement programs, we will not have quite enough money to do it. We will then have zero money left over to fund all the rest of the government programs - no money for defense, NASA, pay for any government employees, etc. Of course that won't work, so we will figure out some way to cut entitlements and ongoing programs both and fund them both at low levels. The overall scope of the cutbacks will be much more than the $1 trillion annual deficits we currently run. This will plunge the economy into its worst short term downturn ever, as ripple effects of unemployment, etc. spread throughout. This will be a deflationary event. It won't last forever, but will last for several years and be enormously painful.
The paragraph above describes the default case, which is what happens if government doesn't do much. However, I suspect the government will find the above scenario intolerable and will inject itself vigorously into the process, changing the situation in ways that are less predictable. The government could decide not to honor its external debt. Can't you just hear it: "Why should our government pay China when it won't pay its own veterans?" This would allow more money to be used to fund ongoing operations, but would harm trade and hurt the value of savings accounts that include U.S. debt. The government could try to print money to fund its operations, although it would have to be done via real printing (you get your money in physical $20 dollar bills) rather than the current fractional lending approach won't work on the waterfall's edge. That could lead to hyperinflation. Or it could try something we haven't even though of. There is no painless solution, though.
The Sovereign Debt Waterfall Part 2 - The United States
In my previous article, I introduced the metaphor of a country's sovereign debt as being like a canoe on a river approaching a waterfall. Greece was described as being perched half-on, half-off the edge of the waterfall, with bailouts from other European countries keeping it from going over the edge, but not pulling it back upstream. In April of 2010, when Greece reached the edge of the waterfall, their national debt was about 140% of the Gross Domestic Product (GDP), and their annual budget deficit was 11%. Austerity measures imposed by Greece have brought their deficit down to 8% of GDP, and this week's European bailout agreement specified that private investors would only get half of their money back on Greek bonds. The result is that Greek debt is now 120% of GDP. So is 120% debt and 8% annual deficit enough to escape the debt waterfall? Probably not, especially when Greek GDP is currently contracting in a recession. To back away from the waterfall, a country's annual GDP growth plus its inflation rate has to exceed its deficit.
Let's talk about that equation a bit: deficit must be less than GDP growth plus inflation if you want to back away from the waterfall. The first thing to emphasize is that inflation is not a good tool to solve a deficit problem, despite what the equation seems to imply. In the United States, the entitlements which make up most of the government's spending are indexed to inflation. So if inflation increases, that spending area increases just as fast, and no progress is made on reducing the deficit. Inflation also causes stuff to cost more, so all the stuff the government buys costs more and as a result, very little progress can be made on the debt problem by trying to produce inflation. To realistically make the equation work in a country's favor, a country must make its GDP growth rate larger than its deficit.
Here is a comparison of some countries' debts and deficits. These are 2010 figures except for Greece and the U.S. For the other countries, the situation is a little worse in 2011 but I don't have the latest figures. These figures are from CIA Factbook.
Country Debt Deficit
Japan 197% -7.7%
Greece 120% -8.0%
Italy 119% -4.6%
United States 99% -9.0%
Ireland 96% -32.4% (not a typo)
Portugal 93% -9.2%
France 82% -6.9%
Germany 83% -3.3%
United Kingdom 76% -10.2%
Israel 74% -3.8%
Spain 61% -9.2%
South Korea 22% 1.2 (surplus)
Each country in the table has its own unique factors, so the table by itself doesn't tell everything one needs to know. But this can be said: only two countries on this list are moving away from the waterfall. They are South Korea, the star of the lineup, with the lowest debt and an actual surplus. Israel is an example of a country that used to have a debt at 100% of GDP and has run a deficit every year since, but the country's GDP has grown faster than its debt and it continues to do so. I did not put China on the list, because although it looks good, its finances are so opaque that the numbers might be misleading or simply false.
Here are a few other comments. Japan by all measures should have gone over the waterfall already, but they haven't due to some unique factors. They continue to be able to finance their debt at very low interest rates, but it cannot continue forever. The so called PIIGS (Portugal, Ireland, Italy, Greece, Spain) countries are in trouble for varying reasons. Ireland was doing OK until they chose to bail out their banking system. If they had let it fail, there would have been repercussions to be sure, but by moving their bank's debt onto their national balance sheet they increased the risk to their government balance sheet (this is why their deficit was -32% last year). The healthiest major European country is Germany, but even they are moving toward the waterfall, just at a slower rate and with a bit more distance than the others.
So can the U.S. avoid the waterfall? I wish we could, but I doubt it. At the current pace, we will catch up with Greece in a little over two years. While one would hope that the Republican majority in the House of Representatives would exercise spending restraint, this year's government spending (fiscal year 2011) was 5.4% larger than last year's. And that was with all the fuss over government shutdowns, debt ceilings, etc. We can't reduce the deficit if we spend a lot more each year than the year before. The reason we spend more each year despite all that is that our entitlement system (mostly Social Security, Medicare, Medicaid) is locked into fixed payments to qualifying people, and the pool of qualifying people is growing rapidly as the population ages.
The Republican Presidential candidates are not campaigning on specific plans to cut spending, preferring to focus more on exciting tax plans like 9-9-9 or a flat tax. Neither of those will help the spending problem. The Republicans tend to address spending only in the abstract, such as favoring a balanced budget amendment. By the time we ratify a balanced budget amendment, it will be too late. We will have already gone over the edge.
So my conclusion is that we are headed over the edge of the waterfall. I don't know how long it will take to get there, and suspect that a number of the Europeans will get there first. I would guess it might take three years, but if we slip into a strong recession we will get there more quickly. A strong economic recovery would postpone the day of reckoning. There are a lot of government proposals that are scored in terms of what it means for our budget situation by 2020. I can't imagine we will make it to 2020 before encountering the crisis.
Let's talk about that equation a bit: deficit must be less than GDP growth plus inflation if you want to back away from the waterfall. The first thing to emphasize is that inflation is not a good tool to solve a deficit problem, despite what the equation seems to imply. In the United States, the entitlements which make up most of the government's spending are indexed to inflation. So if inflation increases, that spending area increases just as fast, and no progress is made on reducing the deficit. Inflation also causes stuff to cost more, so all the stuff the government buys costs more and as a result, very little progress can be made on the debt problem by trying to produce inflation. To realistically make the equation work in a country's favor, a country must make its GDP growth rate larger than its deficit.
Here is a comparison of some countries' debts and deficits. These are 2010 figures except for Greece and the U.S. For the other countries, the situation is a little worse in 2011 but I don't have the latest figures. These figures are from CIA Factbook.
Country Debt Deficit
Japan 197% -7.7%
Greece 120% -8.0%
Italy 119% -4.6%
United States 99% -9.0%
Ireland 96% -32.4% (not a typo)
Portugal 93% -9.2%
France 82% -6.9%
Germany 83% -3.3%
United Kingdom 76% -10.2%
Israel 74% -3.8%
Spain 61% -9.2%
South Korea 22% 1.2 (surplus)
Each country in the table has its own unique factors, so the table by itself doesn't tell everything one needs to know. But this can be said: only two countries on this list are moving away from the waterfall. They are South Korea, the star of the lineup, with the lowest debt and an actual surplus. Israel is an example of a country that used to have a debt at 100% of GDP and has run a deficit every year since, but the country's GDP has grown faster than its debt and it continues to do so. I did not put China on the list, because although it looks good, its finances are so opaque that the numbers might be misleading or simply false.
Here are a few other comments. Japan by all measures should have gone over the waterfall already, but they haven't due to some unique factors. They continue to be able to finance their debt at very low interest rates, but it cannot continue forever. The so called PIIGS (Portugal, Ireland, Italy, Greece, Spain) countries are in trouble for varying reasons. Ireland was doing OK until they chose to bail out their banking system. If they had let it fail, there would have been repercussions to be sure, but by moving their bank's debt onto their national balance sheet they increased the risk to their government balance sheet (this is why their deficit was -32% last year). The healthiest major European country is Germany, but even they are moving toward the waterfall, just at a slower rate and with a bit more distance than the others.
So can the U.S. avoid the waterfall? I wish we could, but I doubt it. At the current pace, we will catch up with Greece in a little over two years. While one would hope that the Republican majority in the House of Representatives would exercise spending restraint, this year's government spending (fiscal year 2011) was 5.4% larger than last year's. And that was with all the fuss over government shutdowns, debt ceilings, etc. We can't reduce the deficit if we spend a lot more each year than the year before. The reason we spend more each year despite all that is that our entitlement system (mostly Social Security, Medicare, Medicaid) is locked into fixed payments to qualifying people, and the pool of qualifying people is growing rapidly as the population ages.
The Republican Presidential candidates are not campaigning on specific plans to cut spending, preferring to focus more on exciting tax plans like 9-9-9 or a flat tax. Neither of those will help the spending problem. The Republicans tend to address spending only in the abstract, such as favoring a balanced budget amendment. By the time we ratify a balanced budget amendment, it will be too late. We will have already gone over the edge.
So my conclusion is that we are headed over the edge of the waterfall. I don't know how long it will take to get there, and suspect that a number of the Europeans will get there first. I would guess it might take three years, but if we slip into a strong recession we will get there more quickly. A strong economic recovery would postpone the day of reckoning. There are a lot of government proposals that are scored in terms of what it means for our budget situation by 2020. I can't imagine we will make it to 2020 before encountering the crisis.
The Sovereign Debt Waterfall Part 1 - Greece
The nature of the debt problem in many countries of the world can be compared to canoes on a fast moving river, approaching a waterfall. In this analogy, Greece is the lead canoe, now dangling on the edge of the waterfall. The United States is three years away from the waterfall, I would guess. Closer to the waterfall are Portugal, Ireland, Spain and Italy. Japan is also closer to the waterfall, but seems to be approaching it in asymptotic fashion. France and German are six and eight years away from the waterfall, but are attempting to throw ropes to the European nations closer to the edge, and may thereby get to the edge before the U.S. China is on the river somewhere, but its finances are sufficiently opaque as to make it hard to tell where. Israel used to be close to the edge, but has moved upstream and now passed Germany going the other direction. South Korea is a rare model of fiscal discipline which can be said to be not on the river at all. Iceland is an example of a country that jumped out of its canoe and let it go over the edge. This article, part 1 in a series, will focus on Greece.
Greece is on the edge of the waterfall, half way off and half way on. Greece had smooth cruising until they reached the waterfall in April 2010. Normally, a country could not stay on the edge of the waterfall so long, but Greece is a special case because it was first, and it is small enough to be bailed out for as long as the European Nations have the will to do so. That may not be much longer, but in theory Greece is small enough that it could go on for a long time. No one else will stay on the edge but for a short time. The European Union has not forgiven Greek debt or let them default, but instead has extended additional loans (which cannot be paid) on conditions that Greece takes austerity measures sufficient to reduce its deficit. But when one is on the edge of the waterfall, it doesn't matter how hard you paddle in reverse, you are still going over.
Here are some of the financial conditions in Greece. First, their one year treasury bond pays 183% on the open market, as of today (October 25, 2011). Now 183% is not a realistic interest rate for an investment - if it was we should sell our homes and buy Greek treasury bonds. The 183% is instead a gamble on how long Greece will last before reneging on their debt, or until someone decides they will pay only 40 cents on the dollar, or something like that. Furthermore, the 183% is the open market rate, not the rate the Greek government will pay when it issues new treasury notes next month. Next month (unless things fall apart before then), Greece will sell new notes for a very low rate, which no one would normally buy, but they will be bought using the bailout money provided earlier by the other members of the European Union. This is instructive for when the U.S. reaches the edge of the waterfall. The market will spike our interest rates too, but no one will bail us out - we are too big. Our government then will not be able to issue new debt, because we will not be willing to pay 183% interest or anything approaching that. What this means is that when we reach the edge, the government will not participate in further deficit spending. If we think it would be tough to not raise the debt ceiling now, well, the day will come when we no longer raise it due to market conditions.
Second, Greece is going through stringent austerity measures to try to get its deficit down to a manageable level. They won't make it, but they can go through the agony of trying. This has led to major layoffs, cuts in government services, etc. The austerity program has driven Greece deep into recession. Thus it will do to everyone who reaches the edge of the waterfall.
Third, consider Greek pensions. If they are like pension plans in most countries, like Social Security in the U.S., they are heavily invested in Greek treasury notes. If those notes do decide to pay 40 cents on the dollar, then that means Greek pensions will take a 60% cut.
This is how things look on the edge of the waterfall. Greece has not yet gone over the edge. That will be the subject of a later article.
Greece is on the edge of the waterfall, half way off and half way on. Greece had smooth cruising until they reached the waterfall in April 2010. Normally, a country could not stay on the edge of the waterfall so long, but Greece is a special case because it was first, and it is small enough to be bailed out for as long as the European Nations have the will to do so. That may not be much longer, but in theory Greece is small enough that it could go on for a long time. No one else will stay on the edge but for a short time. The European Union has not forgiven Greek debt or let them default, but instead has extended additional loans (which cannot be paid) on conditions that Greece takes austerity measures sufficient to reduce its deficit. But when one is on the edge of the waterfall, it doesn't matter how hard you paddle in reverse, you are still going over.
Here are some of the financial conditions in Greece. First, their one year treasury bond pays 183% on the open market, as of today (October 25, 2011). Now 183% is not a realistic interest rate for an investment - if it was we should sell our homes and buy Greek treasury bonds. The 183% is instead a gamble on how long Greece will last before reneging on their debt, or until someone decides they will pay only 40 cents on the dollar, or something like that. Furthermore, the 183% is the open market rate, not the rate the Greek government will pay when it issues new treasury notes next month. Next month (unless things fall apart before then), Greece will sell new notes for a very low rate, which no one would normally buy, but they will be bought using the bailout money provided earlier by the other members of the European Union. This is instructive for when the U.S. reaches the edge of the waterfall. The market will spike our interest rates too, but no one will bail us out - we are too big. Our government then will not be able to issue new debt, because we will not be willing to pay 183% interest or anything approaching that. What this means is that when we reach the edge, the government will not participate in further deficit spending. If we think it would be tough to not raise the debt ceiling now, well, the day will come when we no longer raise it due to market conditions.
Second, Greece is going through stringent austerity measures to try to get its deficit down to a manageable level. They won't make it, but they can go through the agony of trying. This has led to major layoffs, cuts in government services, etc. The austerity program has driven Greece deep into recession. Thus it will do to everyone who reaches the edge of the waterfall.
Third, consider Greek pensions. If they are like pension plans in most countries, like Social Security in the U.S., they are heavily invested in Greek treasury notes. If those notes do decide to pay 40 cents on the dollar, then that means Greek pensions will take a 60% cut.
This is how things look on the edge of the waterfall. Greece has not yet gone over the edge. That will be the subject of a later article.
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