Where is the US of A going??

Last updated on: August 17, 2010 at 4:01 pm by Matthew Fox

Where is the US of A going?? 2010-08-17T16:01:17-05:00 Matthew Fox

LOGO Patheos Explore the world's faith through different perspectives on religion and spirituality! Patheos has the views of the prevalent religions and spiritualities of the world.

This at present is a million dollar question. And the beauty is that everyone seems to have an answer, yet nobody knows what’s happening, including the ‘gurus’ – the economists and the Feds.

Sample this – an extract from the statement (paraphrased) from the latest meeting (on August 10) of the Federal Open Market Committee, the body that sets the interest rates in the USA:
1. Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months.

2. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.

3. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls.

4. Housing starts remain at a depressed level.

5. Bank lending has continued to contract (data released on August 6 shows that consumer credit decreased at an annual rate of 3-1/4% in the quarter April – June).

And here is the solution offered by the Fed:
1. The Committee will maintain the target range for the federal funds rate at 0 to 1/4%….for an extended period.

2. …The Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.
In simpler words, what it means is that the Federal Reserve will continue to finance the fiscal deficit run by the US Government. So what’s wrong with that?? That’s like writing a blank cheque in favour of the US Government. And when the Fed runs out of money (most of which is also recently printed), what will it do – print more stuff of it. Print money and poof!!!! you get rich. As has been widely remarked, what got the US into this mess is debt and the policymakers are attempting to remedy the situation by taking on more debt.
Keynesians such as Paul Krugman have come out vociferously in support of the fiscal stimulus program (and thereby higher debt levels) that the US Government is running. In fact, they have advocated even a greater stimulus for the economy. Keynesian theory is great on paper but is rarely implemented in the true spirit, as envisaged by Keynes in his pathbreaking book published in 1936 – save during good times and spend during bad times, thereby balancing the budget over a business cycle. The US government, however, has not saved any money since the Carter Administration (except for a brief period during Clinton’s era). But it has added one hell of a lot of financial commitments since then – be it the pensions payable to the baby boomers, or the recent healthcare reform bill.
And most of this debt is unfunded. Based on what I read from a highly respectable and a reliable source on the internet (so I did not bother to check for its accuracy), the present value of future unfunded obligations has been estimated by Lawrence Kotlikoff, a well-known professor of economics at Boston University, at a whopping $202 trillion.
So how is that gap going to be funded? Kotlikoff refers to an IMF study showing the US would have to double taxes, raising an amount equal to 14% of GDP every year from now on. Every year that the gap is not closed, the additional amount is added to the “principal,” making that much more to be paid in the future.
So, with no ‘recovery’ (oh sorry, reduced pace of recovery), high unemployment and huge debts, where is the US going?? Back to square 1 – nobody knows!!!!!
Here are some solutions available to the US:
1. Raise taxes
2. Reduce Government spending
3. Borrow more money and spend more
4. Print more money
The first two seem unlikely, since that will nip the fledgling ‘recovery’ in the bud. More so, with unemployment (officially) at close to 10%, these 2 options are politically not palatable. It’s the 3rd and the 4th, which look more likely.
Bizarre as it may seem, the US Treasury securities are still viewed as the safest asset on this planet. US sovereign debt is still rated AAA. Of course, Dagong, a rating agency in China, has downgraded that rating to AA. Also, with no other currency offering the liquidity that the Dollar offers, it is still the most widely accepted currency in the world. Therefore, countries are still willing to stash Dollars. These Dollars then go back to the US and earn these countries a paltry 2.68% on a 10 year paper (as on August 12, 2010). Sooner or later, countries around the world are going to realize that the US government does not have the resources to pay off its debts. Interest rates will start creeping up and bring the consumption engine of the US to a halt. And when the US cannot repay its debts, what will it do – now here is where we come to the 4th option – yes print more currency. Probably, that may happen much earlier, when Ben Bernanke, seeing no recovery, may decide to drop greenbacks from a helicopter.
And what will all this lead to – the Dollar will become almost worthless, perhaps completely worthless. There are examples galore before us – the present day Zimbabwe or the Weimar Republic of the 1920s.
One may label all this as doomsday mongering. Well, all I know is that conventional knowledge holds, always. With all its innovation in finance, see where the US has gone. The law of supply in economics says that you increase the supply (other things remaining the same), the price goes down. Ultimately, that may be good for the economy, for it will make its exports cheaper and will increase employment. However, the problem is that the US today hardly manufactures anything. So this adjustment process is going to be quite painful.
But sitting here in India, I am of course not complaining. The next few years will see wealth moving to this part of the world and I am all set to bask in the glory.

Previous Post

August 17, 2010

Call on hold

Next Post

August 18, 2010 Coming of Age Part II by Anjanaa Chattopadhyay

Browse Our Archives

Select a Category Aarti Achievement and Leadership AfPak Africa Annual and Year-end Asia Audio Australia Behavioural Sciences Bhagwad Gita Bhagwad Gita Blogging Blogs Business Business Intelligence Business Strategy Cannes Careers Chanakya China Conservation Corruption Creative Daily Links Desh Poems Development & Welfare Devotional Audio Devotional Songs Drama Earth Economics Education Entertainment Environment Europe Everyday Quotes Featured Articles Featured Songs Finance Flickr Pictures Food Geo-Political Global Warming Globalization Health & Medicine Hinduism Historic History Humour India Indian Culture Indian music Indian Weddings Israel Issues Legal Link Love Minorities Misc Motivation and Personal Development Movie Lists Movie Reviews Movies Mumbai terror attacks Natural Disasters Nature News Outsourcing Pakistan Parenting Personal Philosophy Poetry Politics Poverty Quotes Recipe Regular Blog Post Relationships Religion Religious/Spiritual Audio Sciences Showcase Slideshow South Asia Special Stories Spiritual Quotes Spirituality Sports Stories Strategy Technology Technology Terrorism Travel Uncategorized US Video Women Women_s Rights Worship Yoga

Select a Month December 2015 November 2015 October 2015 September 2015 August 2015 June 2015 April 2015 March 2015 February 2015 September 2014 August 2014 January 2014 November 2013 October 2013 September 2013 August 2013 July 2013 June 2013 April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 April 2010 March 2010 February 2010 January 2010 December 2009 November 2009 October 2009 September 2009 August 2009 July 2009 June 2009 May 2009 April 2009 March 2009 February 2009 January 2009 December 2008 November 2008 October 2008 September 2008 August 2008 July 2008 June 2008 May 2008 April 2008 March 2008 February 2008 January 2008 December 2007 November 2007 October 2007 September 2007 August 2007 July 2007 June 2007 May 2007 April 2007 March 2007 February 2007 January 2007 December 2006 November 2006 October 2006 September 2006 August 2006 July 2006 June 2006 May 2006 April 2006 March 2006 February 2006 January 2006 December 2005 November 2005 October 2005 September 2005 August 2005

TAKE THE

Religious Wisdom Quiz

What does the word Genesis mean?

Select your answer to see how you score.

History Creation Beginning Law