The American Debt Crisis

This is a lightly edited version of an email I sent to a client, who asked my opinion about a Youtube video he saw. That’s only the second time this has happened, but I’m worried that it’s happening more frequently. Baby boomers are starting to get their news and views from a variety of sources, not all of equally high reputation.
Howard Davidowitz is an economic prognosticator who says the economy is a disaster and is calling for a mega depression. (I provide the link as backup, not as a recommendation. You’ll lose IQ points while watching it, if you’re not careful.) He seems clownish to me, and when I looked him up, he appears to be an investment banker (not an economist). Nothing he said gave me the impression that his opinions were the result of long and careful reflection.
That aside, Canada will suffer if the US can’t buy our exports. Many of our exports they need, and can’t do without, including energy and natural resources. This is likely to have the greatest impact on our factories (mostly in Ontario and Quebec). It also means that companies will put more effort into diversifying their customer base, cultivating and developing relationships in Asia, South America and Europe.
The USA has similarities and differences with Ireland, Greece and Spain. Similarities include a weakened economy and large deficits. One major difference is the national debt. Compare ( ) the national debt as a % of GDP (income): (2009 est.) Japan is at 193%, Italy, Iceland and Greece are around 115%, Canada is at 83%, Ireland is at 65%, Spain is at 53% and the US is at 53%. These numbers may have changed over the last 11 months. There are two other factors that enter the equation. One is the amount of debt up for renewal, which I understand was a particular problem in Greece, but less in the other countries and particularly manageable in the US. The Americans can borrow for longer periods, and they have relatively smaller proportions that renew on a regular basis. Finally, the credit rating of the country affects how much interest they have to pay to borrow (issue bonds). The US Government, as well as that of Canada, is rated Aaa by Moody’s. Spain comes in a little lower at Aa1, Italy is at Aa2, but the Bank of Greece has had their rating withdrawn.
What we see is that Greece has far more debt than other countries, a large portion of it came due at once and they have to pay far higher prices to finance it, given their lack of credit rating. Other European countries have problems, but not nearly as severe. The US also has problems, but given the fact that they own the world’s reserve currency, they have a stellar credit rating and a reasonable level of debt, I don’t think most people foresee major trouble. Add to that the American economy’s ability to “bounce back” from past troubles, and I hesitate to write them off.