03/08/2011 - 09:02

Analysis: US kicks the debt can down the road

03/08/2011 - 09:02


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Analysis: US kicks the debt can down the road

Going broke slower. Those three words sum up what happened in the U.S. this week and explain why stock markets keep falling and gold keeps rising.

No amount of celebrating the avoidance of an immediate default can mask the fact that the U.S., like much of Europe, is spending more than it earns.

That might sounds like a simple explanation of what’s wrong with the western world, but it is accurate.

What happened in Washington overnight, when the Senate passed laws enabling the U.S. government to borrow more money is that a dreadful day was postponed, not cancelled, just moved forward another day.

In American slang, “the can was kicked further down the road”.

Politicians might not see it that way. Markets do. That’s why prices on the New York Stock Exchange plunged 2%, and gold soared through $US1650 an ounce.

Investors are sending a message to politicians. It goes like this: “We don’t believe you.”

It is, of course, a little more complex than that, but if anything good is to come from this week’s excitement in the U.S. it is the hope that governments learn that a debt problem cannot be fixed by borrowing more.

The only lasting solution to a debt problem is to earn more, or spend less, and neither of those factors has been addressed in a convincing way in what was a political fix to get through the next round of U.S. elections.

The real question is whether the style of government we have in the western world is suited to solving problems as deep-seated as what we’re suffering today, or whether a crisis has to become a disaster before anyone takes decisive action.

Trimming $US2.1 trillion out of government spending over the next decade is roughly half what is required if the U.S. is to achieve financial stability, and until cuts in the order of $4 trillion are made there will be no peace in the financial world.

But, budget cuts of that magnitude will only be made by a government with a political death wish because of the nature of the “auction politics” which has evolved in the western world where elections are fought on spending promises and social welfare handouts without much thought given to the classic business question, where’s the money coming from?

No-one has even attempted to address that question because the answers are politically unpalatable. Either taxes rise substantially, or spending is cut dramatically – or both.

Investors, if not the wider electorate, have seen through this week’s debt-ceiling charade and recognised that the crisis has not been fixed, just moved ahead by a few months.

To test that statement consider the reaction of gold which is signalling more trouble ahead, and the reaction of the debt-ratings agencies which could not bring themselves to pull the downgrade trigger on U.S. debt, yet, but kept the outlook for the country on negative.

Moody’s Investor Services, one of the leading ratings agencies, said this week’s political deal would allow the U.S. to keep its coveted triple-A on debts for now, but added a sobering warning with a list of factors that might lead to “a weakening of fiscal discipline” in the future. The agency lowered its outlook to negative, a warning that the triple-A remains in jeopardy.

It is the negative outlook identified by Moody’s, and felt by everyone, which explains why markets are nervous, and why share prices (and property prices) will struggle to make much headway for months, and possibly years.


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