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Alan Schram

Alan Schram

Posted: May 16, 2010 09:39 PM

Contrasting Greece and America

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The markets have been jittery, as many people worry the US and Europe could be headed in the same direction as Greece.

After all, the US is running a budget deficit and large debts. Greece's deficit is 14% of GDP with a debt load of about 124% of GDP. The US was running a 10% deficit in 2009, and $9.7 trillion in budget deficits projected this decade will drive a debt level of about 100% of GDP.

Furthermore, the unfunded liabilities of Social Security, Medicare and federal pensions already approach those of Western Europe. And the political system is heading towards the cradle-to-grave welfare state, with a higher minimum wage and greater job security and pensions. In addition, the US, following European footsteps, just adopted health care reform.

Increasing numbers of retirees with rising expectations impose upon younger (and fewer) taxpayers the burden of supporting them for a longer life span. As a result, California, a much larger economy than Greece, is in at least as serious a predicament. New York isn't much better.

So people may have a valid reason to worry the US might encounter similar issues as Greece is going through now.

But there are several differences. Most importantly, we issue our own currency, which happens to be the world's reserve currency. Greece is forced to rely on the Euro, which eliminates the flexibility their economy needs so badly.

Having your own currency makes a big difference. Britain, in much worse fiscal shape than we are, but which, unlike Greece, did not adopt the Euro, is still able to borrow at reasonably low interest rates.

Another difference is, surprisingly, demographic. In Greece (and most of Europe), fertility rates fell below the 2.1 births per woman needed to replace the existing population. Greece's birth rate has been below zero population growth for 30 years. In the US, the fertility rate is 50% higher than in most western European countries (and also substantially higher than that of China, Japan or Russia).

In 2000, Greece had about 11 million people, with a median age of 38. In 2050, Greece is projected to have about the same population, but the median age will be 50.

In contrast, by 2050 the US is projected to have a growth of 42% in its working age population (between the ages of 15 to 64). The same group will decline 10% in China and 44% in Japan (the data is from Joel Kotkin's excellent book The Next Hundred Million).

America's demographic dividend, plus its independent currency, put it in a much better position than Greece. And this is why, by the odd circular logic of economic policy in a flat world, the U.S. government, which plans to borrow 42 cents of every dollar it spends next year, is in a position to rescue Greece (via the IMF) from the consequences of their own borrowing.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.