American Debt Part 2

Mark Sandford - March 2013
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In a previous article published almost 18 months ago, I highlighted the precarious fiscal position of the United States of America, still the world's top economy but for how long. This issue suddenly came to a head at the end of 2012 when Congress and the White House struck a last minute accord to avoid the so-called fiscal cliff, a rolling programme of deep spending cuts designed to cut the government's budget deficit. Tax increases for the rich were also agreed at the time by both sides.

However Barrack Obama was forced to sign into law a cut in public spending that will take 85 billion from the Federal Budget this year. Many economists have regarded this as inevitable and well overdue as the USA just could not continue on its current course under growing pressure from the markets. This is not the first impasse over how to reduce US debt and neither will it be the last. The Republicans were simply not prepared to agree to more tax rises and demanded a cut in government spending.

At least half the budget cut is liable to fall on the military whose budget more than doubled after the atrocity of 9-11. The immediate effect will be felt by major defence contractors such as Boeing, Lockheed Martin and Northrop Grumman just to name a few. Acquisition of new equipment is now coming under increasing scrutiny notably hugely expensive programmes such as the Lockheed Martin F-35 Lightning II. Welfare could also be hit too particularly such as benefits for the long term unemployed.

Politicians of all sides have beeen forced to undergo a reality check and acknowledge that the nation could not go on racking up more and more debt. There simply has to be a correlation between what government earns from general taxation and what it spends over any fiscal period. This truth has been finally accepted by countries across the Eurozone such as Greece and Italy. However the United States could prosper over the next two decades given the right stimulus and a strong policy framework. US industrial costs are at least 10% below those of Japan, Germany and France. The country is still competitive against other advanced Asian economies such as South Korea and even Taiwan. This reflects the fact that the white working class and lower middle class are no better off now than they were 30 years ago. Therefore it is no wonder that the Democrats won the last US presidential election.

Investors of all persuasions have also noticed how energy costs in the USA are liable to fall with new exploitation of shale based oil and natural gas. This would cut US imports of oil from the Middle East as well as cutting the cost of crude oil generally. This is not lost on the world's biggest companies when planning their next huge investment. Believe it or not, the United States still has the potential to become a major manufacturing hub and were it to realise this outcome, future prospects for all Americans could be transformed.

The politicians still have to agree a new Federal Budget by March 27th otherwise the government is unable to function properly. This has to happen. Paradoxically the Dow Jones Index jumped to a new high after President Obama signed the budget cut. Perhaps the financial community recognises that the USA is slowly but surely moving towards a more sustainable position. That is good news for us all.


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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