The Ring of Fire, Part 2

As noted in a previous post, I’ve been slowly wading through the mass of data and analysis presented in “This Time is Different: Eight Centuries of Financial Folly“, by Reinhart and Rogoff.  It’s slow going, but I have to concur with Barron’s review:  this book is a “tour de force of quantitative analysis” and is a primer on the critical nature of the “magic” 90% debt to GDP ratio cited by many as a “point of no return” for sovereign debt risk.

The US currently sits at an “official” 84% debt to GDP ratio and, in accordance with President Obama’s current budget, will exceed 94% this very year.  Also noted, these figures do not take into account the full debt burden of the United States federal government, omitting rather critical and significant obligations such as $6.3 trillion of GSE liabilities for Fannie and Freddie

These account balances have been excluded, traditionally, because of the “quasi-governmental” status of these institutions, the “quasi” part now being obsolete.  So, why are they being excluded now?  Well, for starters, including these liabilities increases our debt by roughly 50% and our debt-to-GDP ratio to more than 130%.

These figures, it should be noted, push the US somewhat deeper into the “ring of fire” than, say, Greece finds itself today.  I guess it is “for the best” that these facts stay hidden from the general public, not to mention the global bond market.

Harry Tuttle


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