This May the United States have passed yet another upper limit of the national debt that Congress approved last year at a dizzy level of $14.3 trillion. Now U.S. leadership has mere weeks to avoid default that may take place right after the 2nd of August. The only option viewed as the means of salvation is increasing the plank furthermore. White House offers to increase it by $2.4 trillion more, which will supply yet another delay. This unpretentious idea that doesn’t even resemble a constructive decision causes no joy among Congressmen, who are mostly Republican. The latter ones call to consider yet another cosmetic operation with the debt only after working out a plan for reduction of the state management spending.
We can’t claim that Obama’s administration doesn’t attempt to present such plans. Barack Obama has held a press-conference, reporting about the success at negotiations with representatives of American establishment. Opportunities for reducing spending for more than trillion dollars during the next year were found. Strategic goal that American President defined is reducing the national debt for $4 trillion during next 12 years.
Economy seems to be substantial. The very situation — if we look upon it from the technological point of view — is totally common. For the first time U.S. Congress defined the maximum level of debt in 1917 and since then has increased it a few dozen times. The problem is that today’s events make a vivid illustration of quantity-to-quality transition. Every state has a nation debt, which is not a lethal thing at all. Quite different matter is that the U.S. debt is that big that even if the country decided to pay it off, amount of real money on an entire Earth may happen to be insufficient for that. It has been growing exponentially for such a long time that in the nearest future it may become non-returnable even theoretically. Think upon it yourself — 30 years ago U.S. debt was estimated to be $900 billion. In the middle of 90s — upper limit of the debt made up $3.7 trillion, ten years ago — $6 trillion, three years ago — $11 trillion, today it is $14.3 trillion. It’s easy to notice how quickly the numbers are going up and how the time for reaching yet another beyond-the-clouds limit is shrinking. In relation to the GDP, current national debt of America makes up 95%. Even grounding upon this statistic data, we’re able to make certain gloomy forecasts.
Measures, offered by Obama are very necessary — not just necessary, but rather vitally important. Yet, as it often happens in math, the necessary condition is not always sufficient. How can we take over the national debt, while U.S. President with all of his aides have paid a great effort in order to save 1 trillion, while by the end of 2011, U.S. budget deficit will make up $1.5 trillion? It means that $500 billion will be added to the debt burden. At that, by the beginning of June, 2010 debt of American government used to make up $13.051 trillion. Thus, even having jumped over its limit once again, U.S. Congress will keep the status-quo for two years at best. After that, they will once again need to build on the dangerously swinging pyramid furthermore.
According to Douglas Elmendorf, current Director of the Congressional Budget Office, given the optimistic scenario and ideal conditions by 2035 U.S. national debt will make up 80% of GDP. If something goes bad, though, it will exceed 185% of GDP by the same time. Despite the terrible dispersion of the numbers Elmendorf cites — 105% is quite a delta! — Even the Congressional Budget Office can’t think of the truly salvational means if reducing debt from 95% to 80% is considered to be an extraordinary luck that is only achievable at the most favorable conditions.
The USA itself is disunited in the opinions of how to save the national financial system. President Obama offers to cancel the tax relief for the wealthiest Americans and large prospering companies, to reduce spending for education and healthcare, price of medical service for senior citizens. GOP parliament majority though — including quite a number of those, who represent the aforementioned prospering companies — predictably offer to save the tax benefits for physical and legal persons with high incomes.
In this case, we’re not saying that the Democratic Party allegedly acts as valiant champion of common Americans, while Republicans, who oppose them, protect the interest of capitalists alone. This is merely an illustration of the fact that when financial problems become that big, there’s no way of looking for hidden reserves and solve the painlessly. One way or another someone will suffer. This is already inevitable — we may only change the moment of catharsis (will it happen now or a bit later) to a considerable degree.
«American debt is a foundation not only of our life, but of an entire global financial system. Perhaps, crisis recurrence awaits us if we come too close to the line. That’s why we all have to try our best. Complete confidence in the creditworthiness of the United States is not just implanted into our way of life, it is a foundation of the global financial system» — Obama said, while having a speech at Today TV-show. Despite the pomposity of President’s words, we have to agree with that. We have to try real hard, because the global financial system is actually dependent upon dollar and the U.S. economy.
U.S. economy makes up approximately 24-25% of the global one. Even if such giant subsystem fails, consequences for entire system will be inevitable. Regardless of our attitude towards the U.S. dollar, it is a foundation of the global monetary mass. Yes, this currency unit is grounded by nothing. Certain forecasts that fairly favor China are made for the future. It seems to be the right time for writing the USA off the board, admiring the progressing Chinese economy. Yet, it is unclear who needs whom the most.
China is a global factory, where as the saying about another country goes, one may find everything. All the product mix is to be sold somewhere, as long as export makes up 80% of the Chinese budget. The USA with its closest partners makes up 56% of the entire PRC commodity exchange. As a result of the interconnection, China is the major holder of American state obligations — in the amount of more than a trillion dollars. It turns out that collapse of the U.S. economy is every bit as unfavorable for China, as it is for the USA itself. Consumer is every bit as important as the supplier.
Consecutive resume of unprecedented build-up of debt obligations will be postponed until the bitter end. Unfortunately, «global economy» is bound to the USA in a sort of symbiosis. This is the exact reason why global agencies, mercilessly giving negative ratings to the states of minor importance at global arena, are very cautious of the need the same poor marks to the USA, which national debt is to reach 100% of GDP soon. Putting it plainly, this would mean that from the legal point of view the USA is incapable of maintaining its debts anymore and it has to proclaim the default. It’s hard to imagine the wave of consequences caused by the default of a leading and dominating economy in the world.
Despite that fact that majority of rating agencies are subordinate to the USA to a certain degree, it’s plainly indecent to keep silence furthermore. «If the threshold of a maximally acceptable national debt is not reviewed by the 2nd of August, Fitch will have to reconsider the forecast for the U.S. sovereign rating as a ‘negative’ one» — Reuters cites Andrew Colquhoun, head of the Asian-Pacific branch of Fitch. I.e. everyone in the world calls for the USA to increase the limit of national debt in order to keep the pseudo-calmness at the global arena for 2-3 years more. Here we have to credit American leaders — an entire world hates the USA, but for the sake of general calm, the USA has to stay in the lead. Yet, as a number of smart people said a dozen times — it won’t save the situation. New dollars are printed without breaks and holidays and the trust for them still remains, although in fact the matter of the U.S. national debt is hard choice. Economists from all over the world understand that if the U.S. national debt is increasing a trillion a year, then, given that trend, in a couple of years it will grow up by this amount every 4-5 months. In this case «$4 trillion during 12 years» will be a mere trifle, if no cardinal, painful, yet necessary actions are undertaken.
What these necessary measures are to be like? It seems that no one in the world knows. It seems that this problem has no solutions at all. Global economics itself is an interlaced thing, while collapse of the USA and dollar will inevitably cause the global economic decline. The shortcut would be proclaiming the U.S. default and after that an entire world will be living within its incomes, rather than on credit. Yet, given such instructions, economic, military and geopolitical maps will change beyond recognition, which not everyone at all would welcome.
As a result, an entire world was forced to approve the U.S. financial policy and the macro-economic madness seems to be «the soundest decision» — not because it’s good, but because the other options are even worse. It seems though that soon enough even that sort of therapy will become impossible — otherwise, Congress hearings regarding the increase of the national debt plank and maintenance of the debt «avalanche» are to be held each weekend.