What a Mess: Greece, China, and the USA

02/15/2010 9:15 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

The last time I worried about the combination of “china and grease,” it had to do with making sure my kitchen was clean after a dinner party. So, I’m having to think twice when my nagging concerns about the economy revolve around the conjunction of two countries that used to trigger culinary concerns and now trigger indigestion.

Greece (OK, let’s restore the proper spelling) is such a small country, so historic, so romantic, that it seems almost impossible for it to have become a flashpoint for the world’s financial markets. After all, the GDP of Greece at $357 billion is only a bit more than half that of the state of Illinois, and one-sixth the size of California’s output.

While Americans may be both amused and annoyed at California’s profligacy, we haven’t heard of any movement to oust that state from the union. Yet the world is watching the European Union, quaking at the prospect that it won’t support its weakest link.

Two of California’s top politicos, House Speaker Nancy Pelosi and Sen. Barbara Boxer, don’t seem at all concerned that their state could be punished by the rest of the US. Sen. Boxer co-sponsored a bill to tax all bailed-out bank bonuses above $400,000 at a 50% rate. That would almost bring in enough money to pay California’s pensions for a day. And Speaker Pelosi most recently urged Congress to pass the “Jobs for Main Street” Act, another spending program that would benefit her constituents.

It’s just darn un-American to gang up on a state that can’t handle its budget! I should know, since I live in Illinois, one of the ten states facing the worst fiscal crisis, according to a new report from the Pew Center on the States.

After Illinois ousted its free-spending, wheeler-dealer Gov. Rod Blagojevich, Congress balked at seating his appointed replacement, Sen. Roland Burris. But there was never a thought in Congress to punish Illinois’s fiscal profligacy by kicking that state out of the union.

I guess recent headlines just show it doesn’t pay to get tough with fiscal role models like France and Germany. It took world angst to force them to live up to the obligations of the Lisbon treaty, which requires them to help out a fellow EU member. Seems the world has repealed that old adage about people who live in glass houses not throwing fiscal stones.

Ah, all that talk about glass brings me back to the kitchen and my worries about China. Is it time to start reading the tea leaves—in Chinese? Especially when the People’s Bank of China raises its reserve requirements for the second time this year?

Despite its newfound fiscal restraint, China will officially become the world’s number-two economy, passing Japan in GDP. Gosh, it seems only a few years ago that Japan’s banks were the largest in the world, and its stock market capitalization dwarfed that of the New York Stock Exchange. 

What a downfall—and what an example. If you thought you could spend your way out of trouble, this statistic should shock you: Japan’s debt-to-GDP ratio is currently estimated at 227%. See what a load of debt will do to a country, even with plenty of scared citizens willing to fund it with their savings at very low rates.

Maybe the Western world is looking in the wrong place. Sure, Greece has debt approaching 120% of its GDP, and America’s debt-to-GDP ratio is rapidly approaching 100%. France’s debt stands at around 75% of GDP and Germany is on track to reach 82% in the next few years. Sounds a bit like the pot calling the kettle black.

Meanwhile, China’s debt ratio is estimated to be about 50% of its GDP, not counting its many government guarantees. (That’s OK, because when we calculate US debt, we don’t count guarantees or promises made for Social Security or Medicare, which would surely put our ratio into the stratosphere.) 

Putting it all in perspective, the Western world is rapidly approaching debt indigestion. That’s what you get when you start worrying about Greece along with China. Or maybe it’s what my readers get when I start writing a column just as I’m planning a dinner party!

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