Thursday, April 21, 2011
You can lead a horse to water...
...but you can't make him drink.
Deutsche Bank gets it all wrong in a macro report today, ostensibly comparing the U.S. to a peripheral Euro country. Comparisons only serve to illuminate when the objects are actually similar. In this case, the fact that the U.S. is a SOVEREIGN CURRENCY ISSUER and Eurozone countries are not, default risk is zero since nominal dollars can be used to pay whatever amount the Fed desires.
Our bottom line finding is that the relatively low
risk the market attaches to US public debt belies a
substantially higher degree of riskiness (indeed
one about on a par with the euro periphery)
indicated by standard measures of internal and
external deficit and debt. While the debt ceiling
hurdle will likely be jumped with only moderate
disruption to the Treasury market, the challenges
to a much needed fundamental reworking and
redirecting of US fiscal policy are great. Failure of
US political leadership to make substantial
progress in this area in the next few years will
substantially raise the risk of a bond market crisis.
and further down the report, this gem, which I paraphrase as "If this apple tasted like an orange, it would be more like an orange":
If the US were a Euro member, it could be the
next periphery country to go under, well ahead of Spain. It
is worth noting that Japan does not appear among the
more risky countries on this basis despite its very high level
of government debt