US swims against the logic

Everybody knows it but our government (from this article):

"IMF Looks Ahead and It Doesn’t Like What It Sees Either

In its April 20th 2010 Global Financial Stability Report, the International Monetary Fund (IMF) warned that government risk in the advanced economies is now the biggest threat to the world economy. These governments, the IMF correctly observes, not only took on many of the bad debts incurred by private institutions these past several years, but due to the economic fallout of the crisis, and the existence of a plethora of government social nets, these governments face continuing heavy borrowing needs for at least the next few years. An ugly situation for sure, and one the IMF said could get out of hand, and fast, if not addressed.

In conjunction with the release of the report, José Viñals, Financial Counselor and Director of the IMF’s Monetary and Capital Markets Department, said:

In spite of recent improvements in the outlook and the health of the global financial system, stability is not yet assured.… If the legacy of the present crisis and emerging sovereign risks are not addressed, we run the very real risk of undermining the recovery and extending the financial crisis into a new phase.

This author couldn’t have said it better.

Yet, in 2010, the U.S. Congress passed the largest government spending initiative in history in Obamacare. Now, those same politicians are talking about cap and trade, not to mention even more stimulus programs. This on top of those already horrible 2009 debt risk metrics.

Clearly, America is not addressing the seriousness of its financial state.

Indeed, the IMF put pen to paper, suggesting the very same thing about America. This, taken from the IMF’s World Economic Outlook Database:

America, on the basis of these metrics says the IMF, is a nation going in the wrong direction. With an estimated Deficit to GDP ratio of 10.97% in 2010, only Ireland is expected to show a ratio worse than the U.S.

America is NOT a PIIG?

Surely, you say, America is not a Greece, an Ireland or even a Spain. And in a sense you would be correct. Just not in the way you think. For in one very important respect, America is potentially worse, a lot worse.

You see, America has the Federal Reserve’s printing press. Steward of the world’s reserve currency, America issues debt in a currency it alone can print. America can in no uncertain terms inflate its debt away, without limitation, with a few taps on a computer.

Portugal, Italy, Ireland, Greece and Spain, members of the Euro-zone are countries without a printing press. They can’t bail themselves out by printing money to pay for their debts. No, as we are witnessing in this, the latest financial crisis, they have to show at least some manner of fiscal austerity before they can get access to the printing press of the European Central Bank.

Can the same be said about America?

In essence, the Federal Reserve’s printing press is buying time for America. It allows America to kick the debt-can down the road a bit longer, no holes barred, an option not available to the PIIGS. The result, the appearance that America is in control, its finances manageable, nothing at all like the finances of the PIIGS.

The problem is that same printing press eventually makes matters worse, because it fosters even more irresponsibility on the part of politicians, allowing them to hand out economic goodies without thought, without ever having to ask a single voter to pay for them. And as a result, the debt-can gets ever bigger, while the urge to inflate it away gets ever stronger.