Will the US become a Greek Tragedy?
After all, both countries have significant fiscal deficits, are just recovering from severe recessions, and have large foreign bondholders. Moreover, until recently, both have been in denial about the severity of their deficits.
The fear is that exploding debt funded by foreign investors will make us dependent upon them for our economic growth. If the Chinese threaten to sell our bonds, they might force us into a fiscal austerity program—perhaps funded by lower defense spending—akin to the one that the IMF might impose on Greece.
Such speculation ignores important differences. The US debt level isn’t as high as many people fear. Much of our “debt” is held internally by Social Security. Also, until recently deficits have actually been falling. For the past 30 years, real economic growth has averaged 3%. Deficits have averaged 2.5%. So the debt, as a percentage of the economy, has been getting smaller.
Also, the government is a much smaller part of the economy here than most people realize. Government spending makes up about 28% of GDP. By contrast, the Greek public sector is 40% of their economy. So it’s harder to cut spending there without pushing Greece into another recession. Finally, tax-avoidance and black-market activity aren’t national sports over here like they are in Greece. Corruption takes a massive toll on the economy.
Speculation that the Greek crisis will jump the Atlantic to the US is silly. The US isn’t Greece. Anyone claiming otherwise is either ignorant or unreliable.
Douglas R. Tengdin, CFA
Chief Investment Officer
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