It is almost summer, and as Washington fills with the smells of fried onions and tourists, our latest political Gatsby, Barak Obama is moving forward on the greatest issue in his presidency with all the urgency of a holiday postcard.
The markets are getting really jumpy. On 9th June Reuters, which hardly counts as alarmist, said “Markets are anxious a US default even a brief one would harm the country’s stature”. Fitch Ratings the credit watchdog was warning on any missed interest payments on America’s debt. QE 2 is running out. Fed Chief Bernanke speaks to the nation. And these all follow on Moody’s, and Standard and Poors, both giving warnings of harsh verdicts if sense is not seen before August 2nd.
Goodness, even “Pakistan Today” was calling the US the new Argentina! They said that any “default even a day, would affect the AAA status”.
Perhaps more importantly the Dagong Global Credit Rating Co Ltd, China’s sole ratings agency had stated, baldly, that the US was already in default. As China is America’s number one creditor, this alone should catch Washington’s attention. But there is worse, China, Russia and Brazil have all called for a meeting with the IMF about the US dollar remaining the world reserve currency. Mrs Lagarde, the front runner for the vacant
job as head of the IMF, has been floating round these countries doing deals to secure her nomination, so who knows? These moves may help explain the rise in gold purchases as governments such as China bolster their own currencies with gold whilst waiting to see what will happen next.
It’s not that Obama doesn’t know what to do. He knew when he said “Debating raising limits is a leadership failure, it means further reliance on foreigners to finance reckless fiscal policy” way back in 2006 when the problem must have seemed so much smaller and further away, and one that might never even be his. He must hope today that few of us remember his saying it.
This week America’s sovereign debt watch rating fell from AAA to C
Today America’s debt stands at $14,437,463,792,592.00. At least it sort of was when I looked earlier, as the figures on the official site (http://www.usdebtclock.org/) spun so fast after that 7 there, I simply could not accurately note the numbers. They were out of date by the time my eyes moved back to the page! The debt is rising by hundreds of thousands of dollars every second. It’s scary viewing.
So what is everyone doing about it? Well nothing really. It’s almost like rabbits caught in the headlights of an oncoming truck, sitting frozen with fear. And if you care to visit that site above and spend two minutes watching the spinning numbers you will see what I mean.
There are ongoing talks being led by Mr Biden. Which hardly bodes well.
The problem isn’t actually about the limit. Limits can be moved and undoubtedly this one will be too. After all there have been, in all, about 81 increases in the limit since the Second World War. That is not what spooks the market. It’s the scale and rise of the debt that is so worrying. It’s shooting up at an exponential rate and no one seems to have a blind clue what to do about it. At some point some investors will lose their nerve and call in the debt and the whole house of cards will fall in.
The GOP has no strategy whatsoever beyond bleating about keeping taxes low for the mega rich, whilst cutting the pensions and medicare for the poor. Oh yes, and that all public cuts should exempt the military entirely.
There is a ceiling on American debt of course. It is set at 14.3 Trillion dollars. Yes the figures above are accurate and yes they are more than 14.3.
We passed that a while back. The American government today is currently flying on vapour.
Time for a graph.
So what should they actually do? Apart that is from knocking heads together before the Republicans playing political games spook the markets into another recession. The following are some basic options:
- Get rid of the Bush Tax concessions. Difficult but necessary. The tax revenues must come from somewhere! Like Greece, America must have its rich start to pay their taxes.
- Reduce defence spending. They are drifting there by default actually without admitting as much to the American public. The lack of engagement in the Libya bombing, the talks with the Taliban in Afghanistan, all point to at the least a strategic retrenchment of America’s military reach, and possibly a sign of a certain isolationism returning.
- Cut funding to the poor. Not a popular move 500 days out from an election.
- Let inflation wipe out chunks of the debt. A move which would never go well with the creditors.
- Re-schedule the debt. Difficult.
- QE3 or 4 or 5. But target it – see below.
- Increase the limit. But tied with a program to increase public spending on “things” that are good for the whole nation, be those things roads, houses, investment in new materials and industries, environmental work, a Tsiolkovsky tower or whatever, something to occupy the minds and hands of a generation in something obviously productive rather than these endless unproductive wars that America never wins, and dumping whole generations on the scrap heap without care, work or pensions. Something inspirational that the world could look to with admiration even perhaps gratitude?
Or else America (and the rest of us) would do well to re-read our Scott Fitzgerald.
… “He had come a long way . . . and his dream must have seemed so close that he could hardly fail to grasp it. He did not know that it was already behind him, somewhere back in that vast obscurity behind the city, where the dark fields of the republic rolled on under the night.
… Gatsby believed in the green light, the orgiastic future that year by year recedes before us. It eluded us then, but that’s no matter –
tomorrow we will run faster, stretch out our arms farther . . . .
And one fine morning-
So we beat on, boats against the current, borne back ceaselessly into the past.
F Scott Fitzgerald, The Great Gatsby
Copyright David Macadam 2011