The First Cracks In The Wall

Crunch Report’s ‘raison d’être’ is not defined by the recent mind-blowing financial and political events, but rather by the even more eye-popping future. On our pages we keep on warning for (the effects of) the unavoidable hyperinflation as the sole potent measure for reducing the exploding national debts.

Today we are seeing the first indications that politicians are starting to comment on this in public.

“The European Union’s €200bn fiscal stimulus plan to conquer recession may harm the ability of some governments in the 27-nation bloc to refinance their debts, the Czech Republic’s finance minister warned on Thursday.” says the FT, and continues: “Mr Kalousek, whose government is aligned with Germany in this debate, said: “There is no way of concealing the risks. There are risks attached to the expansion policy by means of which some countries want to tackle the crisis.” The risks were illustrated by Germany’s inability on Wednesday to attract enough bids to sell €6bn of 10-year bonds, an ominous sign for governments that practise less fiscal discipline.

“Some say this is a crisis that has to be tackled through expansion. Others say the crisis should be accompanied by even more rigorous discipline and that, if discipline isn’t adhered to, we’ll have problems refinancing debts,” Mr Kalousek told reporters.”

Yet yesterday, Mr. Obama has repeated his promise to offer full financial support to revive the slumping U.S economy, but his speech “came a day after the Congressional Budget Office released a stunning estimate that the federal budget deficit will reach $1.2 trillion this year, even before accounting for spending and tax cuts in the planned stimulus package expected to approach $800 billion over two years”, reports the NYT.

According to The Economist the situation is even worse for the incoming President and his fellow Americans:

“First, it does not include any estimate of the cost of Mr Obama’s planned fiscal stimulus, which he will seek from Congress soon after being inaugurated. Second, the CBO assumes all of George Bush’s tax cuts will expire as scheduled at the end of next year and that the Alternative Minimum Tax, a parallel levy aimed at the wealthy, is allowed to ensnare a growing share of the middle class each year. True, that is what current law, as opposed to current practice, lays down; but neither is at all likely to happen. (The AMT has repeatedly been “patched” to lessen its baleful effects, and surely will be again.)

But the real problem is that the first baby-boomers retired last year. In coming decades spending on entitlements—the three main ones being Social Security (pensions), Medicare (health care for the elderly) and Medicaid (health care for the poor)—will drive deficits and so debt up sharply. Publicly held debt will climb from 41% of GDP last year to 54% next year, the CBO predicts, then decline (on the assumption that the recession will start to come to an end). But the CBO has previously said that, as America ages and if current policies continue, it could theoretically hit an otherworldly 400% by mid-century.”

Finally, we all have been reading yesterday that the Chinese are increasingly going to spend their foreign reserves domestically, putting a time bomb under the Dollar and Euro valuation. Adding everything up, it is time for our political leaders to start explaining us where they see the exit.

Or, as the FT puts it: “To calm investors’ nerves, finance ministers must make plain how they intend to keep paying creditors without resorting to debasing their currencies. Those who have not already credibly done so are living on borrowed time.”