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Coming Soon: Lower GDP Growth, Higher Taxes

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Was browsing the St. Louis Fed site earlier this morning looking for the PowerPoint presentation delivered yesterday by St. Louis Fed President James Bullard when I stumbled across this briefing on sovereign debt crises. It's little more than an executive summary with links at the end to a variety of papers and sources, but there were some interesting nuggets buried within:

"The sharp increase in the U.S. deficit has been largely due to the recent deep recession and financial crisis. When GDP decreases, government tax receipts also decrease; at the same time, government spending increases to finance programs such as unemployment benefits. The United States recently implemented two major fiscal stimulus plans to boost the economy. As the U.S. economy recovers, the deficit should fall as government revenues increase and recessionary spending decreases. According to the Congressional Budget Office, the U.S. deficit-to-GDP ratio was 9.9 percent in fiscal year 2009 and projected to decrease to 4.1 percent by 2012. In comparison, Greece had a deficit-to-GDP ratio of 13.5 percent in 2009, which is projected to be 15.4 percent by 2012."

Okay fair enough. The briefing goes on to note that, for now at least, U.S. debt is viewed as stable. No mention that a large degree of that stability is because U.S. banks have been replacing the slump in foreign demand for Treasuries by purchasing massive amounts on their own. Still, the conclusion, although less dire than the hysteria surrounding a default or TOTAL COLLAPSE OF THE CURRENCY (emphasis added for shock value), is inescapable: At the very least, high sovereign debt levels will mean lower GDP growth and higher taxes. At the very least.

Factor in structurally high unemployment, the concurrent downturn in social mood and the sacrifices that will be asked on the federal, state and local levels to pay for basic services while simultaneously skimming off the top of these sacrificial monies to pay public pension guarantees... well, something will have to give. This is my prediction: in the not-too-distant future, taxpayers will revolt, forcing either a  massive reduction in public pension obligations, say 30 cents on the dollar, or their outright cancellation. It will be unpleasant, harsh and ugly.
POSITION:  No positions in stocks mentioned.