US debt future remains unclear
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Added on August 2, 2011 at 20:54
The debt deal passed the U.S.
Article added on August 2, 2011 at 17:31 Riga time
After long and pretty unfruitful
debt talks, the House has approved and the
Senate is about to approve the rather infamous 74-page
Budget Control Act Amendment.
President Obama will give it his stamp of approval. Is this the return of
No, not really. As Louie Gohmert, a Republican U.S. Representative from
Texas, said in essence on C-Span today. It is the same old story. It is at
best a baby-step forward in the right direction. Congress Democrats and
Republicans remain unable and/or unwilling to tackle the problem of the
deficit and the public debt seriously. Gohmert himself was against the
hundreds of billions of cuts in military spending.
The future of the US debt remains unclear. The question of tax loopholes has
not been addressed. Too many rich people and companies profit from
loopholes. Closing them would bring in a substantial amount of tax revenue
without having to raise taxes, which would keep the Tea Party happy and
“liberals”, meaning left-leaning Democrats, too.
The official Chinese Xinhua news agency was not convinced by the debt deal
“risks and troubles” lay ahead in US
“debt economy”. China Central Television analyzed the debt deal as
already part of the 2012
China holds the world's largest foreign exchange reserves, worth some $3.2 trillion, 60% of which are in
dollars. With $1.15 trillion,
China is also the world's largest holder of US Treasuries. When your main creditor
starts worrying about his investments in your country, you should seriously start worrying
about your future too.
Japan holds some 20% of all US treasuries. The country has a public debt of
some 200% of GDP and could suddenly need money and start withdrawing capital
from the United States.
The FT writes that “South Korea, Asia's fourth-biggest economy, holds
64 per cent of its reserves in dollar-denominated assets”, with US T-bills
being the central banks favorite form of investment.
If those three countries start shifting their money elsewhere, interest
rates for the US public and private sector as well as individuals will rise,
further slowing down US growth, which has already been corrected downwards
in recent days.
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American songbook sheet music
Before the August debt deal, the 2011 US deficit was expected to reach 9% of
GDP and public federal & state debt to approach 100% of GDP. It is time to
come up with a more convincing deal. A long term plan is needed. As long as
the US debt future remains unclear, markets will worry and the recovery
remain weak. Confidence is needed, along with long term fiscal and budgetary
Let's repeat again our
February 2009 catch-22 phrase: you should both spend and save at the same
Fiscal discipline is requested, but you should also invst in the
infrastructure and public schools. Two-thirds of the US
economy are driven by consumption, but consumers are indebted. The government,
the states, communities and individuals have been living above their means
for decades, e.g. buying goods from China, being paid for by the Chinese via
the purchase of US T-bonds. The fairy-tale economy comes to an end.
With Greece still deep in debt and
credible solution, in sight, with
Italy's debt crisis far from over,
markets have woken up. The United States have to deliver. Piling debt
on debt as in the case of Greece is no longer an option. It is not too late
for the US (as well as for the EU and Japan) to wake up, but time is running
out sooner than some dare to think.
Fannie Mae and Freddie Mac, the banks, the defense budget and other black
holes have to be brought under control. The moment the world will seriously
start doubting that US Treasury Bonds are save, it will be too late.
Before the adjustments, the Congressional Budget Office estimated the 2012
to 2021 deficit to reach $6,9 trillion. That puts the $2,4 billion of
savings predicted by the 2011-budget-reduction-plan into perspective.