Wednesday, February 27, 2013

US heads for 'slow motion train wreck' over debt crisis

If you thought Italy had sovereign debt issues, you should take a look at the United States. Total public debt this week stands at nearly $17,000 billion, equivalent to 75% of the value of the country’s annual output.

Half is owned by foreign investors, principally China and Japan. They are understandably nervous. The once mighty dollar has fallen in value by 10% against major trading partners’ currencies since 2009.  

Good news for US exporters but bad news for those holding dollar-denominated debt. Some suggest that the declining dollar is part of a covert global currency war as the major capitalist nations desperately seek a trading edge over their rivals.  

But the US federal debt mountain is about to come crashing down on the heads of ordinary Americans. Barring a last-minute deal uniting the bitterly divided American political class, a 10-year programme of cuts in federal government spending, known as “the sequester”, is about to kick in.

Amounting to $1.2 trillion dollars, the automatic trigger mechanism is the result of a decision by Congress in 2011 which was itself a compromise. The Budget Control Act was the flip-side of a deal that allowed the self-imposed limit on federal debt to be raised.

At the time it was argued that the effects of the automatic cuts would be so unacceptably severe that the Congress would be sure to do something to avert them. They’ve been delayed as much as was allowable, but the debt crisis has worsened inexorably as the global contraction has tightened its grip, and time’s up.

According to the Bipartisan Policy Centre, “sequestration’s effect will be akin to that of a slow motion train wreck. The uncertainty has already impacted economic growth, and while there won’t be a sudden ‘cliff that occurs on March 1, the ramifications will steadily worsen as time passes.”

Cuts for the seven months remaining in the 2013 financial year amounting to $85 billion will be spread equally between defence and domestic programmes.  Getting a clear understanding of the full impact of the cuts on people’s lives and the effects on the services they provide and receive, is proving difficult.

These are just a few of the expected headliners for this, the first part-year of a – and I repeat - ten year programme of shrinkage:

  • Economic growth (GDP) will be reduced by 0.5%
  • Between 700,000 and 1 million jobs will disappear
  • 800,000 defence department civilian employees face enforced unpaid leave of 20% equating to one day a week.
  • $600 million to be cut from the Federal Aviation Administration mean that thousands more will be forced to take unpaid leave.
  • The cuts could lead to the closing of hundreds of air traffic control towers
  • 600,000 low-income people receiving help from the Women, Infants and Children programme may lose out
  • Up to 70,000 children from low-income families could lose access to the Head Start programme
  • military veterans and dependents of an active service member could be denied elective medical care    
  • thousands of teachers and aides could lose their jobs, and many special education and pre-school programmes could disappear.

Obama’s administration is in favour of reducing spending but wants to do it differently, with a deal on tax increases for the wealthy – fiercely opposed by the Republicans and the Tea Party. Tax cuts for the rich introduced by President Bush were permanently extended as part of the deal which temporarily averted the “fiscal cliff” at the beginning of the year.

Even with the sequester, the impact on long-term debt growth is forecast to be small. The federal debt will continue to grow, until eventually reaching 100% of GDP.

Warning to the American people: expect worse; much, much worse!

Gerry Gold
Economics editor

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