We are becoming more concerned that 2011 may be shaping up to be the year of the public debt crisis. Greenspan seems to share those concerns. The Hill writes,
“Look, I think something equivalent to what Erskine Bowles and Alan Simpson put out is going to be passed by the Congress,” he said. “The only question is, is it before or after a bond market crisis?”
Greenspan said he is “hoping that we have enough sense to realize that we’ve got to resolve this issue before it gets forced upon us.” His fear is that the long-term deficit could “spook” the bond market “to a point where long-term interest and mortgage rates move up very sharply.”
“If that happens, that will cause the double dip,” he said.
Is Greenspan moving to the European position on fiscal deficits, believing in Ricardian Equivalence? Listen to this,
Even though there are some signals the economy is improving, Greenspan said, businesses are failing to make key investments because they are uncertain about the future. He said this is true to an extent that he has never seen before.
“The business sector is concerned is that business is highly uncertain about the future in a way which I’ve never seen it before and a way in which the data suggests has never, in fact, been so depressed,” he said.
Businesses showing an unwillingness to invest in long-term assets, according to Greenspan.
“Unlike previous recoveries when, for example, we would be getting very significant pick ups in building, residential, nonresidential, in a sense, longer-term assets, we’re not getting that today,” he said. “It’s a big hole in the economy.”
He pointed out that constructing a building, for instance, is a 20 or 30-year investment. Businesses are unlikely to begin making longer-term investments until some of the question marks disappear, according to Greenspan.
“Unless and until we can begin to lift that pall of uncertainty, it is very difficult to see people reaching out into the longer term,” he said.
One thing we think Mr. Greenspan is missing is that the “U.S. too large to bail.” During the sovereign crises of the past thirty years, the U.S., alone, could step-up and bail-out any of the countries in trouble.
This year’s U.S. budget deficit is larger than Canada’s GDP and would be the 9th largest economy in the world. Stabilizing a crisis of that magnitude would be almost impossible if the market were to lose confidence. Do you really think the Chinese, Germans, Russians, and Brazilians would put together a $500 BN rescue package for the U.S.?
We continue to monitor the 10 and 30-year Treasury rates for market confidence. The 10-year rate is right at an importance resistance of 2.83 percent. This next Congressional session may be the most critical in many years. Stay tuned!
