Ecuador Vs. US Debt

Dec 24th, 2008 by Gary

Ecuador recently defaulted on some of its bonds when foreign obligations reached 21 percent of its $44 billion gross domestic product (GDP) compared to the U.S. national debt of about 400% of U.S. GDP.

This means there is a good chance that expats will continue to arrive.

The sun always shines somewhere. Most often in Ecuador! Here is the sunset at our apartment in San Clemente.

According to excerpts in a USA Today article by Dennis Cauchon, entitled “Taxpayers on the hook for $59 trillion,” the federal government’s losses would be five times worse if corporate-style accounting standards are used.

The article says: “Modern accounting requires that corporations, state governments and local governments count expenses immediately when a transaction occurs, even if the payment will be made later.

“The federal government does not follow the rule, so promises for Social Security and Medicare don’t show up when the government reports its financial condition.

Bottom line: Taxpayers are now on the hook for a record $59.1 trillion in liabilities, a 2.3% increase from 2006.

Then the problem grows worse. A US News & World report says: “Welcome to America’s $2 Trillion Budget Deficit. Barack Obama has already said that America’s “investment deficit” will take priority over its budget deficit.

A rough estimate of the cost of this New New Deal would be close to $500 billion a year, maybe $775 billion if Uncle Sam is to completely offset the drop in consumer spending predicted by Rosenberg. Now, as it is, the government is expected to run a $500 billion deficit next year. So the S&S plan would put that budget deficit at over $1 trillion. And if you tack on a potential $500 billion to $1 trillion bailout of the banking industry, that $1 trillion deficit could conceivably double to $2 trillion.

Now I’m not one to get skittish about budget deficits when they are merely a percentage point or two of GDP, especially since it’s entitlements that pose the truly scary debt issue (some $55 trillion in future liabilities, getting worse by $2 trillion to $3 trillion every year as we do nothing). But a $2 trillion budget deficit would be, like, 15 percent of GDP. That would be the highest level since World War II and more than twice as high as the postwar peak of 6 percent in 1983.

I can’t believe the global bond and currency market vigilantes wouldn’t completely freak, sending U.S. financial markets into chaos. Talk about a worst—though entirely possible—case scenario.”

So Ecuador and most countries actually have less debt in terms of GDP than the US.

I am not suggesting that Ecuador’s economy is great. The economic downturn is almost everywhere. I do not think Correa was wise to default…but the reality is that many major nations are running worse debt and have more fiscal problems then emerging countries. Eventually investors and people who are willing and able to change their lifestyle, will catch on.

Ecuador has great weather and wonderful resources. This is Mt. Cotacachi.

This puts Ecuador in a good position with its vast natural resources, wonderful weather, friendly people and low cost living. Merri and I hope to see you there.

Ecuador’s friendly people make this a great place to live.