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
• 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