Satyajit Das: America's Fiscal Cliffs and Debt Mountains
It is unlikely that America's problems will stay in America. The rest of the global economy is tied to the US as it edges closer to the cliff.
Given that the US constitutes around 25% of global economy, it is unlikely America's problems will stay in America. The rest of the global economy is tied to the US as it edges closer to the cliff.
If the US takes the decisive action suggested then US growth will slow sharply in the short run, though the downturn may be shorter in duration and the longer term brighter. If, as likely, the US does not take decisive action then US growth will still be affected, though less significantly in the short run. But America's debt position will become increasingly problematic. America's long term growth prospects will also be adversely affected.
Any slowdown in US demand will affect its major trading partners such as China and Europe, exacerbating slowing growth affecting their trading partners.
US dollar devaluation will create pressure for appreciation of other currencies. This may force other nations to implement measures, such as zero interest rate policies, QE programs, or capital controls, to halt or at least slow the appreciation of their currencies to avoid reductions in competitiveness.
Foreign investors in US dollars and government bonds are likely to suffer losses. Large investors like China and Japan may suffer significant declines in the value of these assets, reducing their national savings.
In Hamlet, William Shakespeare's tragic hero states that: "I must be cruel only to be kind; thus bad begins, and worse remains behind." In trying to preserve its position, the US now is increasingly adopting toxic economic and financial policies, which have the potential to damage other nations and ultimately its own future.
Former French Finance Minister Valery Giscard d'Estaing used the term "exorbitant privilege" to describe American advantages deriving from the role of the dollar as a reserve currency and its central role in global trade. That privilege now is "extortionate."
Economist Herbert Stein observed, "If something cannot go on forever, it will stop." But he did not say when. How long the US can continue it profligate ways is unknown.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.