If someone were to spend more than they earn, that difference is called the deficit. The deficit has been a problem for many nations, as politicians have repeatedly spent more money than they are pulling in from revenue. Running a deficit is tolerable if it is temporary and is closely followed by a surplus that paid off the accumulated debt. The problem arises if a government continually runs a deficit, which then causes the overall debt to increase.
We need to learn from this example…
Similar to the U.S. economy, only years earlier, the Japanese economy also burst following a boom in real estate prices. To help revive its economy, the Bank of Japan brought interest rates to near zero in 1999 and has done several rounds of quantitative easing since. The central bank of Japan has increased its balance sheet to 166 trillion yen. (Source: Wall Street Journal, March 21, 2013.)
But all this monetary stimulus—interest rates near zero for years and lots of money printing—has helped the Japanese economy. In fact, global exports from the Japanese economy fell 2.9% in February 2013 from February 2012. This is important because it shows how the Japanese economy is struggling even after implementing unheard of monetary policy intended to bring economic growth to the country—similar to what the Federal Reserve is doing now in the U.S.
February marked the eighth consecutive month of slowing exports and an increasing trade deficit (more imports than exports) for Japan—the biggest streak of trade deficits since 1980. (Source: Bloomberg, March 21, 2013.)
Japan’s national debt to gross domestic product (GDP) stands at about 204% of GDP—this shows you just how easy monetary policy has been in Japan.
The Japanese economy should be looked upon as a good example for the Federal Reserve to see how its monetary policy will play out in the U.S. economy.
What has this done for the Japanese economy with all its paper money printing? Not much, to say the least. Since 1998, wages in the Japanese economy are down seven percent, property prices are down 51%, and … Read More
Municipal bonds investors might be headed towards a storm, which may cause significant damage to their portfolios. Cities within the U.S. economy are in distress—they are struggling to keep their spending in order to not increase their budget deficit.
Detroit, one of the biggest cities in the U.S. economy, was handed an emergency manager by the state to take care of the city’s budget deficit. The city is running a deficit of $327 million and has $14.0 billion in long-term obligations—mainly municipal bonds backed by the city’s water and sewer systems. (Source: “Snyder Says Detroit Needs Emergency Manager to End Fiscal Crisis,” Bloomberg, March 1, 2013, last accessed March 21, 2013.)
Michigan’s Governor, Rick Snyder, explained the city’s situation, saying, “it’s a sad day, a day I wish never happened, but it’s a day of promise.” (Source: Ibid.)
If the state didn’t intervene, then Detroit would have been the largest municipal bankruptcy in the U.S. economy—leaving municipal bonds investors in misery. In November 2011, Jefferson County, Alabama was the largest municipal bankruptcy in the U.S., involving more than $3.1 billion in municipal bonds.
Municipal bonds investors have enjoyed tax advantages in the U.S. economy, but if there is a downturn in these types of bonds, then the benefits will quickly disappear.
What’s ahead for municipal bonds investors looks even more troublesome. Williston, North Dakota’s municipal bonds were downgraded by Standard and Poor’s from “A-” to “BBB+.” (Source: KFYR-TV, February 28, 2013.) The municipal bonds credit rating went from being in the upper investment grade to almost the non-investment grade.
Moody’s Investor Services has downgraded 11 municipalities in the U.S. from … Read More
The U.S. Department of the Treasury reported that the U.S. government incurred a deficit of $204 billion for the month of February 2013. So far, we are into the first five months of the government’s fiscal year (started October 1, 2012), and the U.S. government fiscal deficit has already grown by $494 billion. (Source: U.S. Department of the Treasury, March 13, 2013.)
The U.S. government has been running a deficit of over $1.0 trillion in each of the past four years. For 2013, the Congressional Budget Office (CBO) expects the deficit to be $845 billion—which is less than a trillion-dollar budget. (Source: The Hill, February 5, 2013.)
(But if I pro-rate the $494 billion the government has already tagged on this year, a rate of $99.0 billion a month, I get another $1.0-trillion deficit year.)
Sadly, while many are taking “less” deficit as good news, our national debt is still growing. Remember: when the government doesn’t have money to spend, it must borrow. The budget deficit for this year is going to see the U.S. national debt increase to well above $17.0 trillion.
In February, the U.S. government paid interest of $16.8 billion on the debt it has borrowed through issuing bonds. Since the beginning of the fiscal year, it has incurred interest expenses of $168.4 billion.
I don’t think the mainstream realizes that the more the government adds to the national debt through budget deficits, the more interest payments it will have to make. This year it expects to pay almost half a trillion dollars in interest. This amount will rise as the national debt increases and interest … Read More
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