How Not To Do It

Mark Sandford August 2011
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The recent wrangling by both Democrat and Republican politicians over America's debt limit has not inspired confidence in the world's largest economy. The United States came unbelievably near to being declared technically insolvent. Both sides of the House of Representatives have been forced to give ground and make some concessions as well as members of the US Senate. The only positive side of this saga is the fact that politicians of all persuasions have been forced to undertake a sudden reality check and form a bipartisan committee to oversee a programme of spending cuts over the next 10 years amounting to at least $2.1 trillion.

This debacle did not emerge suddenly overnight. For years the US government has been spending much more than it earns in fiscal tax receipts. Nobody has given a thought for one moment about the likely consequences and what happens when the bill is called in. It should come as no surprise that the US dollar is practically on the floor as regards its trading value versus other currencies.

The present saga has also exposed other long standing weaknesses within the US economy such as lack of long term planning and complete utter ineptitude in penetrating export markets around the globe, notably in emerging markets such as Latin America and Asia. The USA does have some world class companies such as General Electric or IBM but most businesses are more engaged with domestic consumers because of the size of the domestic market. Even before the credit crunch, the USA was running a current account deficit of over $750 billion. This was only made sustainable by huge capital inflows, notably investors buying US government bonds.

After the recent crisis, the USA can no longer lecture to the rest of the world as the model of success in a free market economy. Current unemployment in the USA stands at 9.1 % of the total workforce and this is unlikely to ease in the short or medium term. There exist widespread concerns across the rest of the world over the USA's present growth rate and the prognosis for the US economy. The ratings agency Standard and Poor has now downgraded US debt from its AAA rating for the first time in decades.

Combined with recent concerns over the issue of indebtedness among some Eurozone countries such as Italy and Spain, it is not surprising that stock markets took a complete battering within the last week. The position of the Chancellor of the Exchequer has also been vindicated yet again in that tax revenue must be earned in the first place before it is spent. If more countries observed such financial discipline, they might not find themselves under the pressures that they do at present. There is much to be said for the old proverb that there is no such thing as a free lunch. Somebody has to pay somewhere.

Tragically, this means that projected growth rates for the UK economy have also been cut for this year. The OBR originally expected growth to come in at 1.7% for 2011. This is unlikely to happen and many people believe that it is only the Bank of England holding interest rates steady at 0.5% which has stopped the UK tumbling back into recession. We should also consider ourselves fortunate that our unemployment is only 7.7% of the workforce.

Mark Sandford - Permission granted to freely distribute this article for non-commercial purposes if attributed to Mark Sandford, unedited and copied in full, including this notice.

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