Even the USA has to tackle its deficit

 

                          The US has been able to borrow larger sums for longer than European countries. More people and countries around the world will accept dollars and lend money to the USA.

                          Even the USA will discover there are limits to how much other people’s money you can spend before they refuse to lend you so much on such favourable terms. The politicians in Washington had realised that before Standard and Poors yesterday put the  USA on  notice of a possible downgrade of its credit status. A mild rebuke from the Agency attracted a lot of media attention. It has given the US politicians another push in the direction of deficit cutting.  The Agency did not take sides between the Democrats who want more to come from taxes, and the Tea Party members who want more to come from spending cuts. In a run up to a Presidential election there will be plenty of politics in arguing over how, how much and when deficit reducing measures should be put in.

                 Meanwhile expect the lawmakers to agree that their current limit of $14 trillion of borrowing  is simply not generous enough. This will be relaxed.

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

31 Comments

  1. lifelogic
    Posted April 19, 2011 at 7:25 am | Permalink

    Oh for some sensible politician who just wanted to do good by doing less. Politicians who wants to set the people free to achieve so much more untethered to the malignant state tumour teat.

    • lifelogic
      Posted April 19, 2011 at 11:38 am | Permalink

      Are they really suggesting Gordon Brown for the top IMF job? I had assumed it was just a joke – in very bad taste. Is being proven to be completely wrong, in your sense of direction, now the best way to get a top job state sector job?

      What next Jonathon Porritt (or Vince Cable) in charge of business and energy production and future predictions. Or perhaps John Major in charge of the economy and making the Tories popular again.

      • Bazman
        Posted April 19, 2011 at 6:53 pm | Permalink

        Not as funny as Boris Johnson for Prime Minister as some Tories would like.

        • lifelogic
          Posted April 19, 2011 at 9:57 pm | Permalink

          After Heath, Major, Blair and Brown could Boris really be much worse? His largely unused bikes are clearly daft but at least he is not killing people in pointless wars or wasting money in every direction on a bigger and bigger state.

      • APL
        Posted April 19, 2011 at 6:57 pm | Permalink

        lifelogic: “Are they really suggesting Gordon Brown for the top IMF job?”

        I asked that of myself too. But I suppose it could be a sort of ‘humanitarian’ gesture. The whole International financial system is teetering on the brink, Brown as head of the IMF would certainly bring the whole ‘shebang’ to the ground.

        • Geoff not Hoon
          Posted April 20, 2011 at 5:13 pm | Permalink

          All, I gather the plan is for Brown to hold the post whilst terms etc. are sorted out with one J. Redwood Esq. who is eminently suited to the post and far more so than the oaf Brown.

          • lifelogic
            Posted April 21, 2011 at 8:21 am | Permalink

            Alas rather unlikely.

            Proven and pliable failures seems to be what they are looking for. People prepared to go on TV and argue that black is white while keeping a straight face and do as bidden in return for high pay and pension.

  2. Alte Fritz
    Posted April 19, 2011 at 7:33 am | Permalink

    The prospect of having, on default, to hand the keys over to their Chinese creditors may concentrate their minds.

  3. Javelin
    Posted April 19, 2011 at 7:39 am | Permalink

    I still don’t understand why people don’t see the obvious. And even if they do tackle their debt they will still be bumping along the bottom. When (and I say when not if) they cut their spending then the US companies will suffer – US companies like military and Microsoft will see their profits eroded. Taxes will rise which will lead to a rise in the far right. The US is also racially stratified which will lead to deeper problems. The US will slow down spending and take another 0.5% off our growth. The future is predictable. This will have a deeper impact than 9/11. I understand the markets rebounded quickly – but this will be a slow burn.

    And talking of problems it’s now unquestioned that Greece will default (as I posted here at least 3 months ago). Greece and Ireland simply can’t afford their debts the EU has strung them along for additional powers at the cost to tax payers of billions – when the bond holders should have paid.

    I’ll also repeat my often repeated prediction – I’ve even convinced the journalists at City AM – Italy is the domino that will fall. It’s second to Greece in it’s GDP:debt ratio (112) to Greeces (150). It’s tax collection is poor – it’s banking system is opaque and fragmented, banks have crippling cross dependencies on each other, the Government and other soverigns, the Eu stress tests were heavily tailored to help them pass, it’s sex obsessed leader will garner no White knight from Europe, Italy has a very strong risk of bringing down Europe – and the world economy.

    • lifelogic
      Posted April 19, 2011 at 8:55 am | Permalink

      You say “I still don’t understand why people don’t see the obvious.” Many see it but in general they act out of individual and group personal interest and against the interests of the public. After all the public only get an occasional very weak vote. In the meantime there are fees to be earned, favours to be sort, power bases to be expanded, expenses to be claimed new jobs to be lined up.

      The public interest would get in the way.

      • Jose
        Posted April 19, 2011 at 11:01 am | Permalink

        I like it and couldn’t agree more!

    • waramess
      Posted April 19, 2011 at 9:53 am | Permalink

      Well, that will be a lot of fun then, won’t it?

  4. oldtimer
    Posted April 19, 2011 at 9:10 am | Permalink

    The significant development is the decision of the BRICS to look at alternatives to the US$ for their own mutual transactions and at alternative baskets of currencies that will serve as reserve currencies, both having the effect of by passing the US$. On a five to ten year horizon (if not sooner) it looks very likely that the US$ is on the skids to lower valuations.

    The only way this will not occur is if the US political class gets a grip on its runaway spending and QE programmes. That seems about as likely as the EU getting a grip on its issues. Disasters will need to strike first before they act to solve their problems.

    • forthurst
      Posted April 19, 2011 at 3:21 pm | Permalink

      It’s 40 years since Nixon unlaterally terminated the Bretton Woods system, since when the US government has been enabled to have its cake and eat it. Thence the US dollar became the world reserve currency, by default, rather than under any international agreement. The private secret FED fills its balance sheet with the toxic byproducts of Wall Street (word left out)greed and the US Treasury bonds that foreigners would eschew at the prevailing coupon.
      The party will go on until the music stops, and as it no longer pays the piper, the USA will not decide when, because the US Congress will never curtail those activities which supply it with the funds for re-elections: bringing democracy to the world down the barrel of a gun, facilitiating the pillaging by Wall Street (operators-ed), propping up toxic states.
      I say ‘never’, but then again that is entirely contingent on whether the MSM can maintain its monopoly to groom the population for the benefit of the (word left out) oligarchy in Washington and New York. Is that likely to happen before the producing nations decide that they want something more substantial than fancy bits of paper for their endeavours? Only time will tell.

    • Acorn
      Posted April 19, 2011 at 7:40 pm | Permalink

      We’re Doomed! We’re All Doomed!

  5. wab
    Posted April 19, 2011 at 9:46 am | Permalink

    “Meanwhile expect the lawmakers to agree that their current limit of $14 trillion of borrowing is simply not generous enough. This will be relaxed.”

    Well, I hope so, otherwise the crisis of 2008 will look like a tea party (excuse the pun). But many of the crazies who now run the Tea Party (= Republican Party) would be happy for the country to go into default. One of their aims in life is to destroy the federal government.

    Most people in the Tea Party do not want to cut all spending, only spending on poor and/or(words left out) people “not like them”. For example, most of them do not want the military budget to be cut. And many of the ordinary Tea Party people are old, and so big users of Medicare, which (surprise) they do not consider to be “spending” because it is money spent on them. Unfortunately for these ordinary people, the Republican elite (like Paul Ryan) want to destroy Medicare, because, you know, it is more important to have tax cuts for billionaires than to spend money on the health care of old people.

  6. waramess
    Posted April 19, 2011 at 9:54 am | Permalink

    ….and of course, if George does not pull his socks up a similar letter will shortly land on his doormat

  7. Gary
    Posted April 19, 2011 at 10:04 am | Permalink

    This may be off topic but you may want to review this to see that the FED is selling short term paper and buying long term paper and then selling put options to “insure” against their default thus having the effect of lowering the risk premium to suppress long term rates. And they are (not being as transparent as they should-ed) This trade is backing them into a corner and is so huge that when, not if, this blows up it will decimate the economy. Ask yourself how in the UK is most govt debt long term and long term rates are not rising despite QE?

  8. Stuart Fairney
    Posted April 19, 2011 at 12:16 pm | Permalink

    With respect JR, for S & P to state this publically is somewhat more than a mild rebuke. Of course it’s no more than a statement of the obvious.

    The Republican/Democrat hegemony will not cut spending especially if President Obama is re-elected as seems probable. Thus we can foresee the dumping of the dollar as the reserve currency, serious internal problems for the US as Bernanke and Geitner try to print their way out and rip-roaring inflation more or less destroying the dollar and with it the American standard of living ,civil order in many parts of the country and world empire.

    We live in remarkable times. Who would have thought in 1980 that the two superpowers of the day would both be destroyed not by nukes but by internal economic contradictions.

    The mad thing is, it’s not too late for the US if only they would elect a constitutionalist. They won’t. I deeply regret this all too predictable decline and fall.

  9. sm
    Posted April 19, 2011 at 12:53 pm | Permalink

    So maybe we are at the end of the begining if and when China decides to reduce the size of US$ pile (3 Trillion) and its growth. This should lead to a revaluation of the Yuan upwards and hopefully a smooth switch to internal growth. Also hopefully allowing the World to rebalance.

    The relentless importation of cheap products and outsourcing of labour to lower cost producers with economies with no basic social infrastructure cannot be allowed without standards being forced up by international agreement, its really about fair trade not just free for footlose capital.

    If the consuming countries are unable to finance further imports & consumption the exporters must find new markets or downsize. This is why serious imbalances should be part of the Free Trade Agreements, which would trigger agreed stabilising mechanisms like tariffs/revaluations/social minimum infrastructures standards and ‘equitable’ (loosely used) tax collection.

    At least the US could go it alone – if needed – it may need a new gold backed currency or state backed competing currencies.

    I heard relocated jobs were being offered by a Company in the UK, to UK employees, with Phillipine local terms including a rice allowance? What price free trade? You can do business here but can you pay tax in rice?

  10. fake
    Posted April 19, 2011 at 2:30 pm | Permalink

    *The prospect of having, on default, to hand the keys over to their Chinese creditors may concentrate their minds.*

    I think the chinese only have something like 10-15% of their debt.

    Still a bucketload of money, but not the doomsday scenario often presented.

  11. rose
    Posted April 19, 2011 at 2:37 pm | Permalink

    No mention of Primrose Day?

  12. william
    Posted April 19, 2011 at 2:52 pm | Permalink

    A failed treasury auction at the end of 2011,courtesy of the Chinese,after the usual autumn currency sell-off’s,might just grab Obama’s attention.

    • Stuart Fairney
      Posted April 19, 2011 at 5:36 pm | Permalink

      The fed just hoovers up failures with QE ~ it’s all insane.

  13. Mike Stallard
    Posted April 19, 2011 at 4:17 pm | Permalink

    Well noticed! At last common sense is beginning to prevail. If USA goes down our Welfare State route, then it, too, will grow poorer and poorer.
    I am fascinated to see what will happen next. The Euro, the Dollar, the Pound – which will crash first? AND what happens to world trade when just one of them goes under?

  14. Andrew Johnson
    Posted April 19, 2011 at 5:31 pm | Permalink

    If America Inc was a business company, it would be bankrupt. It has been spending more than it has earned for many years, just like Britain and Europe, only on a much more profligate scale.

  15. Conrad Jones (Cheam)
    Posted April 19, 2011 at 11:10 pm | Permalink

    The United States is currently paying $254 billion in interest payments per year alone.

    The population of the US is 310,232,863 (July 2010 est.)

    That works out to be $818 for every man, woman and child in the United States for the year 2011.

    And not one dollar of the US debt is paid off.

    In 2011 They are to spend ($3,591 billion) includes:
    $830 billion on “Defense”
    $846 billion on Healthcare
    $746 billion on Pensions
    $149.5 billion on Education
    (gross public debt was $14,456 billion)

    In 1955 they spent ($73.4 billion) includes:
    $47.2 billion on “Defense” — more than half the total budget
    $ 0.9 billion on Healthcare
    $ 4.8 billion on Pensions
    $ 1.3 billion on Education
    (gross public debt was $274.4 billion)

    Interestingly, it appears that Defense spending has reduced as a proportion of the total budget.

    The other thing that could be inferred is that inflation appears to be running at around 4892%, assuming that similar goods and services were received for the amount spent. But; health, education and pensions have dramatically increased their share of the budget so it’s not just inflation that has increased the US budget.

    What is quite hard to understand is – if Healthcare , Pensions and Education have received such a large increase in federal spending, why are so many people in America livng in such poverty and ignorance – why do so many Americans have no Health Insurance? Why have so many Americans lost their Homes? Where has all this money gone? The Real estate market perhaps?

    5268% is the amount that the US debt has gone up, which is not a lot more (in real terms) than the budget increase taken from 1955 to 2011. If it wasn’t a problem back in 1955, why is it a problem now? Is there an attempt to destroy the US Dollar by promoting scare tactics or is it just a way of scaring Financially ignorant American Politicians into providing Bail Out Money at zero interest for the Banks?

    In 1955, 35 United States Notes bought one ounce of Gold.
    Today it takes 1,495 Federal Reserve Notes to buy one ounce of Gold.
    That’s 4271% increase in the price of Gold.

    My conclusion would be that the US debt is bigger in real terms than it was in 1955, but not really that much bigger. The flip side of this coin is that the US Dollar has lost so much of it’s purchasing power.

    As the Banks are allowed to create or expand the money supply, then it is common sense to say that they are responsible for this devaluation.

    • Stuart Fairney
      Posted April 20, 2011 at 9:20 pm | Permalink

      “What is quite hard to understand is – if Healthcare , Pensions and Education have received such a large increase in federal spending, why are so many people in America livng in such poverty and ignorance ”

      If you see statism for what it really is, this is not difficult to understand at all, it is all too predictable. Government programs often achieve the exact oppiste of the stated goal. When the “war on poverty” really got going in the 1960’s and federal spending jumped, poverty levels stagnated (they had previoulsy been falling). Hardly surprising ~ if you pay people to stay poor, they will, especially with high marginal tax rates.

      As for education, if you seperate the people paying from the people providing the service by putting government in the middle, the service provider becomes accountable to politicians not patients. Hence you lose the ultimate sanction of withdrawing from the deal and will tend to get the service that suits the government not the patient.

      Politicians need this to remain relevant, influential and rich. We however do not need them.

  16. Conrad Jones (Cheam)
    Posted April 19, 2011 at 11:22 pm | Permalink

    In addition to my previous comment, I would also have to say that it is also common sense to say that the US Government is also responsible for expanding the money supply through selling Treasury Bonds to the Federal Reserve Bank who then generate brand new Dollars to add to the expanding money supply.

    I believe the equivalent to this in the UK is the DMO (Debt Management Office) and the Bank of England.

  17. Gary
    Posted April 20, 2011 at 9:10 am | Permalink

    Dumping the reserve currency, Stuart is not very easy. The dollar is an oil backed currency and that backing is entrenched by force by a military larger than all the rest of the rest of the world combined. As long as oil is only sold for dollars by the largest producers, then every other country must sell their goods for dollars so that they can purchase oil. When an oil producer reneges on that they get beaten up. It is a protection racket. You want protection? You do as we say. Russia and the Caspian is the biggest threat to this and control of the vicinity is required. Hence Afghanistan.

  18. Geoff not Hoon
    Posted April 20, 2011 at 5:15 pm | Permalink

    Mr. Redwood, The worry for Britain and indeed Germany is for the US to begin further protectionist measures against imports to try to protect domestic jobs, taxes etc. Watching Obama on Fox News it is clear he hasnt a clue to the seriousness of the situation.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page