http://blogs.telegraph.co.uk/finance/edmundconway/100005702/us-face...

Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem -“even
the United States, the world’s largest economy, has a very large fiscal
deficit” were his words. They were rather vague, but by happy
coincidence the International Monetary Fund has chosen to flesh out the
issue today. Unfortunately this is a rather long post with a few chunky
tables, but it is worth spending a bit of time with – the IMF analysis
is fascinating.

Its cross-country Fiscal Monitor is not easy reading and is a VERY big pdf (17mb), so I’ve collected a few of the key points. The idea behind the document is to set out how much
different countries around the world need to cut their deficits by in
the next few years, and the bottom line is it’s going to be big and
hard (ie 8.7pc of GDP in deficit cuts around the world, which works out
at, gulp, about $4 trillion).

But the really interesting stuff is the detail, and what leaps out again and again is how much of a hill the US has to climb. Exhibit a is the fact that under the Obama administration’s current fiscal plans,
the national debt in the US (on a gross basis) will climb to above
100pc of GDP by 2015 – a far steeper increase than almost any other
country.

US gross debt as a percentage of GDP

Compare it with the UK, which is often pinpointed as a Greece in the making. As you can see, gross debt increases sharply, but not by anything like the same degree.

UK gross debt as a percentage of GDP

Another issue is that, according to the IMF, the cost of extra healthcare and pensions will increase by a further 5.8pc over the next 20 years. This is the biggest increase of any other country in the G20
apart from Russia, and comes despite America having far more favourable
demographics. It is significantly more than the UK’s 4.2pc.

But level of debt isn’t the only problem. Then there’s the fact that the US has a far shorter maturity of government debt than most other countries, meaning that even if it weren’t borrowing any extra cash it
would have to issue a large chunk of new stuff each year as things are.
The killer table to show you that is this one, which shows a country’s
“gross financing needs” – in other words how much debt it has to issue
in the coming years to keep itself functioning.

Britain, as you can see from the second column on the left, has one of the biggest deficits in the world. However, because it also has the longest maturity of average debt in the world (far right column), and
so doesn’t have to issue as much new debt each year just to keep
rolling that stuff over, its gross financing needs are – at 32.2pc of
GDP, way bigger than Britain’s, at 20pc. Come to think of it, it’s
actually worse than Greece on this measure.

What does this mean? Basically with a large financing need, you are particularly vulnerable if the market suddenly decides it doesn’t want your debt, since those extra interest rates they charge you mount much
more quickly. Japan, by the way, is the one with a real problem on this
front. It could hardly be any more vulnerable to a sudden drop in
investor demand, and many over there fear that the moment domestic
savers stop buying JGBs, the country is doomed to Greek-style collapse
(though it doesn’t share Greece’s current account deficit and,
crucially, has its own currency, so I don’t know about that).

On the flip side, unlike Japan or Britain, the US does not have a central bank with quite such a large stock of government debt. Both the Bank of England and Bank of Japan have done so much quantitative easing
(buying bonds with printed money) over the past few years that they
have the power to cause a fiscal shock if they decided they wanted to
sell off their bonds at once. This table shows you that America, while
not entirely guiltless on this front, has less of a shadow hanging over
it.

But all of the above is what explains why the US, according to the IMF’s projections, has more to do than any other country in the
developed world (apart from Japan) when it comes to bringing its debt
back towards sustainable levels. Here’s the killer table. The column to
look at is on the far right: note how the US needs a 12pc of GDP chunk
chopped out of its structural deficit (ie adjusted for the economic
cycle). That’s $1.7 trillion. Wow – that’s not far off Britain’s total
annual economic output.

So does all of this mean the US is Greece? The answer, you might be surprised to hear, is no. Now, it is true that the US has some similar issues to Greece – the high debt, the need
to roll over quite a lot of debt each year, the rising healthcare costs
and so on. But it has two secret (or not so secret) weapons. The first
is that unlike Greece it is not trapped in a monetary union. The US,
like Britain and Japan, can independently control its monetary policy;
it can devalue its currency. These are hardly solutions in and of
themselves, but they do help make the adjustment a lot easier and more
gradual. Second, the US has growth. It remains one of, if not the,
world’s most dynamic economies. It is growing at a snappy pace this
year (in comparison to other countries). And a few percentage points of
GDP make an immense difference, since they make those debts much easier
to repay.