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Satyajit Das: America's Fiscal Cliffs and Debt Mountains

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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.

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Debt 22

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.
No positions in stocks mentioned.

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