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Is the US Done For?

Omkar Goswami


Unless you are a hard core Republican or a Tea Party Luddite, both of whom seem to be in conspicuous abundance across the land of the free and the home of the brave, you have to feel sorry for President Barack Obama. Within two years of his winning a historic victory, his presidency seems to be in tatters. No, not as awfully ripped apart as the Indian test cricket team in England, but not that far away either.

For one, neither the Republicans in the US Congress led by the House Speaker John Boehner and the Senate Republican leader Mitch McConnell nor the Administration, led by POTUS (yes, that’s what the President of the United States is officially called) made matters easy. The gladiatorial antagonists circled each other time and time again, thrust and parried with spears, nets and short swords, neither willing to give an inch till the very end. That led to the needless tension of eleventh hour fifty-ninth minute collective nail-biting as the clock and commentators counted down to a default.

The spectacle helped neither the Republicans nor the President. The former were seen as redneck bullies; the latter as an intellectually arrogant obdurate. Extreme positions were taken and doggedly held on to till a fraction before the end. The Republicans wanted to bridge the growing gap between expenditure and income through drastic reduction in social sector and health spends, without agreeing to an iota of increased taxes; the President wanted no cuts in his healthcare reforms and other key social benefits while wanting to raise taxes, especially for the wealthy. Neither wanted to budge.

For another, the US federal debt problem was gargantuan — even if one ignored the fact that the print media exaggerated it to no end and created a fear psychosis of sovereign default with every day that the Congress delayed in coming to an agreement. Here is the data:

• US federal debt has increased by over $500 billion each fiscal year (1 October to 30 September) from FY2003 to FY2007, and then rose by $1 trillion in FY2008, $1.9 trillion in FY2009, and $1.7 trillion in FY2010.
• As of 3 August 2011, US gross federal debt was $14.34 trillion dollars. That is $14,340,000,000,000 — just so that you get a sense of what it means to be a prisoner of zeroes. Of this, $9.78 trillion was held by the public, including the People’s Bank of China and the Reserve Bank of India; and the remaining $4.56 trillion was intra-governmental holdings, such as for social security.
• Nominal GDP for the year as of June 2011 was around $15 trillion.
• Therefore, the ratio of gross federal debt to US GDP is 96 per cent.

Unfortunately, the last minute Congress agreement doesn’t count for much. It raises the debt ceiling by some $2.1 trillion, which is expected to serve the government’s needs up to 2013. Of this, $900 billion came into force right away and the remaining $1.5 trillion is estimated to materialise by the end of the year if a special Congressional committee can reduce the deficit to that extent. In addition, there is a commitment to cut expenditure by $917 billion over a decade. It was like applying Band-Aid to an arterial haemmorhage.

No wonder then that Standard & Poor’s (S&P) cut the rating. According to its press release: “We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.”

Is this the end of the US and the dollar? I think not. Four things are worth keeping in mind. First, over the last decade, the US has had high deficits and significant public debt. It made no difference so long as the economy was humming along with over 3 per cent real GDP growth per year. Second, the problem has come into sharper focus because of poor economic performance since end-2007. Burgeoning public debt doesn’t sit well with fears of a double-dip. Third, while the road to economic recovery remains rough, the US remains the only western country that has the entrepreneurship, innovative abilities, demography and energy to effect a turnaround in the next two to three years. And fourth, the greenback remains the global currency — not the euro nor the Chinese renminbi.

If I were to compare the travails of the US with the unholy mess in the euro zone, I would be marginally negative for the former and two thumbs down for the latter. The next global financial eruption will not be in the US. It will be in Greece. Or Ireland. Or Portugal. Or Spain. Or Italy.

Published: Business World, August 2011


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