Profligate America

The International Monetary Fund says the US lacks a credible strategy to stabilize its mounting public debt, having planned for less than half the tax rises and spending cuts necessary to reduce the debt over the medium term.

The politicians are blamed for failing to address the problem, while squabbling over whether their pitiful efforts to do so should be focused more on raising taxes or cutting spending. But in fact the politicians are the captives of their voters. They know that while Americans give a lot of lip-service to the idea of cutting the fiscal deficit and stopping the build-up of public debt, they aren’t prepared to pay the price themselves in higher taxes or reduced benefits.

And the shrewder ones know that their nation can continue with its policies of profligacy for a lot longer.

► If investors become unwilling to continue financing the fiscal deficit, the Fed will print the money needed, as it has already shown its willingness to do. It’s the privilege that comes with being the global superpower.

► If foreigners grow unwilling to finance the foreign trade deficit, the dollar will weaken. That will strengthen the US’s international competitiveness. And foreign investors will shoot themselves in the foot by destroying the real value of their dollar bonds.

► If the consequences are rising inflation, then that will be exactly what policymakers want. It will stimulate domestic demand, demolish the threat of deflation, and furtively erode the real burden of the national debt.

So why should American politicians do any more than posture?

When conditions start to become painful for voters, the politicians just find men of straw to blame. The latest example is the way President Obama has reacted to anger over the rise in the price of petrol to $4 a gallon. He blames it on speculators.

In fact it’s clear that soaring oil prices are not being driven by speculators, but primarily by the plunging value of the dollar, which is a consequence of official policy. That policy also promotes speculation through continuing to make available a vast pool of cheap credit.

Longer-term, oil pricing pressures would be eased if companies were encouraged to develop production from the US’s huge resources in shale deposits, offshore, and politically-protected conventional onshore resources. Instead, official policy prevents or discourages such production, while wasting zillions on promoting high-cost renewables.

Higher oil prices shaved US economic growth in the first quarter by ½ per cent to 2.6 per cent, according to Moody’s economist Mark Zandi. He estimates that if prices average $100 a barrel for the rest of the year, it will depress economic growth, making it 0.3 per cent lower than if they had remained at 2010 levels. He says if oil averages $125 a barrel for a few months, it will reduce growth by 1 per cent. Prices averaging $150 would push the economy back into recession.

One indication of how much trouble the economy is still in, is that last year a record 18 per cent of personal income was in the form of welfare payments from the government, including social security, Medicare, food stamps, unemployment and similar benefits. Wages accounted for only 51 per cent of personal income – the lowest level since records began in 1929.

The weak recovery in residential property has disappeared. The latest figures show prices falling more than 3 per cent over 12 months, taking values almost back to the previous low in April 2009.

This is a post from the excellent On Target newsletter  by Martin Spring - free subscription at
afrodyn@afrodyn.plus.com