Thursday, April 3, 2008

peru, investment grade ... usa, ???

fitch upgraded peru to investment grade today. it's just worth noting once again how many parts of the world are getting richer as we face a worrying economy. while commodities remain key to peru's growth, Fitch spots some key changes underway:

... it is important to highlight an incipient structural shift in the drivers of Peru's economic growth, as the most dynamic growth rates now stem from the non-primary sectors.

in other words, they're starting to figure out how to create their own domestic demand to consume their own products...
many parts of the world are starting to look like the USA in the 1950s... and they will view us as we viewed britain after WWII -- poor, weaker and ruined. it took a war to end their empire. for us it took an unrestrained credit monster ... consider the instincts of mass economics, the planning of rockefeller envisioning his massive, integrated refineries, or the imagination of ray kroc? people have been running restaurants since the dawn of civilization. why at this point in time could won explode across the globe? it's because of the american tendency for american explosive growth ... it was also applied to selling more mortgages, more mortgage debt and more houses. more, more, more. an old economist professor of mine in college, steve fazzari, said the key thing in national economics is "more is better" -- the classic keynesian model. but now it's time to start being a little smarter about what we're getting more of...

one more thing fitch said about peru:

Positive trends in public finances, underpinned by high commodity prices and the strength of the economy, have led to an improvement in Peru's government debt burden relative to peers, which at 28% of GDP is in line with the 'BBB' median. 'The Garcia Administration has resisted current spending pressures and has used the commodity windfall to invest in infrastructure, pay down public debt and increase assets,' says Theresa Paiz Fredel.

Fiscal restraint, liability management operations, and sizable reserve accumulation in recent years have allowed net repayments of public external debt. As a result, the public sector became a net external creditor in 2007, sooner than initially anticipated. Peru's net public external debt (NPXD) to current account receipts (CXR) ratio, a key rating weakness in the past, reached an estimated -22% by the end 2007, approaching the 'BBB' median of -26%.
[bold added]

this is a far cry from our situation.. consider the costs we face over time: various mortgage bailouts, the war, the slowing economy and weakening municipal financial -- all under the shadow of long-term medicare and social security liabilities.
within in 3-5 years, the AAA status of the US will come under question. it will slowly start to be discussed with increasing frequency. over time, Treasuries will trade at a discount to german debt, etc. how long until the USA is like Ambac or MBIA, hanging on to AAA just because a downgrade would trigger all kinds of other contingencies? (all the textbooks simply assume the USA will always be AAA.)
it would be interesting to consider the fall of GM and Ford from investment grade into junk as a model for what our own loss of AAA would be like ... so many similarities, and so little time tonight.

2 comments:

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