| US in fiscal denial |
| 22.11.11 10:26 | |
|
The experience of the peripheral Eurozone countries up until 2009 was that it was a perfectly reasonable option to subsidize growth with debt with only limited observance of fiscal rules. This changed when buyers decided they no longer want to finance the status quo. Austerity is the obvious alternative to living off borrowed money and this lesson its being felt across the Eurozone. The US, however, is yet to put a coherence austerity plan in place despite having a budget deficit close to 9% of GDP and a debt in the region of 100% of GDP; which is far worse than the position in the Eurozone overall. President Obama appeared to talk tough yesterday suggesting that he would veto any attempt to water down the automatic stabilisers that are due to take USD1.2trn from the US deficit over the next 10 year. He also went further to suggest that the budget would be reduced by USD2.2trn over the next decade. However, many critics have been suggesting that a meaningful US deficit reduction target would have to be in the region of USD4trn. This target seems to be well out of the reach of the current poorly functioning US political system. In spite of a wide (but improved) current account deficit, the US is still finding ample overseas buyers to fund its borrowings. During the messy negotiations over the US debt ceiling this summer and despite the downgrade by S&P, investors have continued to see security and liquidity in the US treasury market. With bonds well underpinned it would be wrong to suggest that the poor US fiscal situation has been a USD negative this year other than via the ordinary mechanism through which lower yields have reduced the carry on USDs. As long as the Eurozone crisis persists the USD is likely to provide a safe haven in times of intense uncertainty. The USD may therefore be bid into year end and through until early 2012. However, a solution to the US fiscal outlook will have to be put in place sooner or later to protect the USD’s long-term health. source: Rabobank |
| < Prev | Next > |
|---|