U.S. Debt Just Grew by $11 Trillion

Republicans and Democrats spent last summer battling how best to save $2.1 trillion over the next decade. They are spending this summer battling how best to not save $2.1 trillion over the next decade. In the course of that year, the U.S. government’s fiscal gap -- the true measure of the nation’s indebtedness -- rose by $11 trillion.

The fiscal gap is the present value difference between projected future spending and revenue. It captures all government liabilities, whether they are official obligations to service Treasury bonds or unofficial commitments, such as paying for food stamps or buying drones.

Some question whether “official” and “unofficial” spending commitments can be added together. But calling particular obligations “official” doesn’t make them economically more important. Indeed, the government would sooner renege on Chinese holding U.S. Treasuries than on Americans collecting Social Security, especially because the U.S. can print money and service its bonds with watered-down dollars.

For its part, economic theory sees through labels and views a country’s official debt for what it is -- a linguistic construct devoid of real economic content. In contrast, the fiscal gap is theoretically well-defined and invariant to the choice of labels. Each labeling choice changes the mix of obligations between official and unofficial, but leaves the total unchanged. Read more >>

Spain braces for 3rd austerity round amid hemorrhaging tax receipts

Spanish Prime Minister Mariano Rajoy may unveil a third austerity round within days as his six-month- old government tries to avoid a second bailout amid hemorrhaging tax receipts. Rajoy said on July 2 the time has come to “press the accelerator pedal” as he tries to tame bond yields. Government officials have said they are considering raising taxes on gas and products that have a reduced rate, such as food, hotels and restaurants.

Rajoy plans to announce an overhaul of public administration this week, Maria Dolores de Cospedal, his deputy in the ruling People’s Party, said today. Spain’s return to recession is undermining efforts to cut the euro area’s third-largest budget deficit as tax receipts shrivel. Ten-year bond yields climbed back above 7 percent today as European finance ministers meet to discuss the worsening debt crisis. Spain became the fourth euro-region country to seek a bailout in June to shore up banks burdened with bad loans.

“The commission will make its proposal for a new path of fiscal adjustment” for Spain at a meeting of euro-area finance ministers tonight, Economy Minister Luis de Guindos told reporters in Brussels. “We will analyze its implications and explain the measures we are taking and that we will take.” Read more >>

Financial ‘Armageddon’ Will Happen Despite EU Deal: Rogers

cnbc.com
Even as markets cheered the agreement by European leaders to allow the direct use of the bloc’s bailout funds to recapitalize struggling banks, well-known investor Jim Rogers told CNBC the move does nothing to help solve the region’s biggest problem, which is its high debt levels.

“Just because now you have a way to get them (the banks) to borrow even more money, this is not solving the problem, this is making the problem worse,” Rogers said on Friday.

“People need to stop spending money they don’t have. The solution to too much debt is not more debt. All this little agreement does is give them (banks) a chance to have even more debt for a while longer,” he added.