When on the edge of the Fiscal abyss…..

Now while the Mayan long count calendar ran out without causing an apocalypse, there is another ticking clock that will run out shortly and could create an economic apocalypse for America.

For sometime I have discussed the financial situation facing the US government. In essence, contrary to what Americans would like to believe they have as big and bloated a public sector as much of the EU. And indeed it is the very people in the US who wail the loudest about “big government on our backs” who receive the biggest subsidy cheques (many of America’s top companies count uncle Sam as either their best customer or indeed their only one, many of the “tea party states” receive more money in federal subsidies than their citizens contribute in tax).

Of course the problem facing the US is that their citizens pay but a fraction of the tax rates we pay in Europe. Naturally the inevitable gap that results in the countries finances has to come from somewhere and for the moment they are getting around this problem by borrowing money from the Chinese. But that’s not a sustainable strategy….just ask the Greeks!

Indeed currently, with a deficit of 8.7% the US has a higher deficit than any of the troubled Eurozone countries. With its higher rate of inflation (due to QE) and low interest rates, anyone buying dollars is literally loosing money with every dollar they buy. It is only the “irrational” attraction of investors to the dollar that is shoring up the US economy (much as the allure of euro’s worked for Greece and Ireland) but sooner or later this infatuation will end, and the results for the US are unlikely to be pretty.

But, neither the republicans nor the democrats are willing to see the sort of spending cuts implemented, necessary to close the deficit gap. As they quite rightly recognize that this would all but guarantee them loosing the next election!

Raising taxes, notably for the wealthy seems an obvious solution. After all they have some $21 trillion stashed away in offshore accounts. But again the republicans are dead set against this, as they after all represent the wealthy and many of their members fear tea party reprisals if they vote for tax increases (of course if spending cuts of the type the tea party often ask for were implemented it would be far more devastating!).

In essence the Americans want European levels of public spending with tax haven like rates of taxation. Something has to give.

When back in 2011 the Republicans held the US government hostage to a deficit increase, as part of the negotiations Obama wrote in a sort of “nuclear” option. This would see automatic increases in taxes and cuts in spending …where it hurts! The idea behind this was that it would be so painful politically to members of congress of both the main parties that they would be spurred into action and agree a deal rather than face these cuts/tax hikes coming into force.

Unfortunately, the US government’s financial long count calendar runs out on January the 1st. The economic devastation witnessed in the EU as a result of the German/IMF “austerity measures” are in all probability likely to be repeated in the US as a result, probably pushing the US back into recession, which will all but guarantee the UK’s triple dip recession becomes a reality.

But it would seem that the men of congress are staring into the abyss…the abyss stares back…and they say…its all the black guy’s fault, where’s his birth certificate!

As I’ve commented before that anyone can try to make party politics out of a crisis as serious as this merely demonstrates the poor and sorry state of democracy in the US. That politicians can literally be playing the blame game while racing towards a cliff as they place scoring points off each other as more important than averting a major crisis. A crisis that will cost many working Americans their livelihood.

As Steff Flanders at the Beeb discusses this is actually a more worrying crisis than the one facing the Eurozone. As with the last such crisis its likely America’s credit rating will suffer and the markets will punish the US government for its dithering incompetence. Indeed personally I wonder who would be stupid enough to buy dollars the way the Americans run their economy.

No doubt the republicans are foolishly assuming that they’re friends in the markets won’t betray them….my fear is that realising the world has lost all confidence in the US economy, the US hedge funds will take great delight in profiting from America’s demise, as a Goldman Sachs trader let slip last year.

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5 thoughts on “When on the edge of the Fiscal abyss…..

    • Agreed, if JM Keynes were here he’d probably conclude that Obama wasn’t spending enough to stimulate the economy…but!…Keynes was never in favour of a long term policy of deficit spending with no end.

      Once the recession is over the US has to be prepared to put up taxes to pay off the debts accumulated. And it needs to be prepared to make savings now where it can (reversing GWB tax cuts and cutting back on military spending seems like a plan).

      Unfortunately, with the exception of Bill Clinton, nearly every other US president of recent years has consistently failed to deliver a balanced budget, even when the economy was doing great and could easily afford to pay for it.

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      • No, it’s true. Keynes would have said spend to create the boom, and pay off the debt once the boom is going.

        The main problem the US has appears to be that the government isn’t running it, or rather, somebody is running the government.

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