Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20
Facebook (FB) AI Mega-trend Tech Stocks Investing 2020 - 10th Feb 20
The US Constitution IS the Crisis - 10th Feb 20
Stock Market Correction Continues - 10th Feb 20
Useful Tips for Becoming a Better Man - 10th Feb 20
Will CoronaVirus Pandemic Trigger a Stocks Bear Market 2020? Part1 - 9th Feb 20
Could Silver Break-out like it did in 2011? - 9th Feb 20
The End of the Global Economy - 9th Feb 20
Fed to Stimulate in Any Crisis; Don’t Let Short-Term Events Bother You - 9th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

European Sovereign Debt Crisis Wake Up Call for US?

Interest-Rates / Global Debt Crisis Feb 28, 2011 - 06:59 AM GMT

By: ECR_Research

Interest-Rates

Andy Langenkamp writes: The American fiscal condition faces a perfect storm. The outlook for the medium term has deteriorated markedly. Some important causes are the Big Recession and the extension of the Bush tax cuts. Nor are the projections cheerful in the long term. In the coming period these issues will come to a head.


Two essential dates on the US political-financial agenda are approaching fast. On March 4, the spending authority that has kept the US going in the past budgetary period is set to expire. Last year, Congress did not pass a budget, and a special measure was put in place to legally underpin public spending in the absence of an official budget. This “stop-gap” bill needs to be replaced. Otherwise federal government cannot continue to spend during the remaining seven months of the fiscal year 2011.

The other looming deadline is the day the US hits its debt ceiling. By law, the US budget deficit should not exceed $14.3 trillion. It will likely reach this maximum at the end of May. To raise the ceiling would require Act of Congress.

Democrats and Republicans have climbed the barricades in preparation for the fight about these financial hot potatoes. Actually, the term “barricades” may well be misplaced. More likely, both Democrats and Republicans will dig themselves deeper into the trenches and only raise their heads above the parapet if the other party makes a significant move. Obama’s 2012 budget proposal is no more than a long wish list that offers few real solutions to the US debt problem. Its main aim seems to be to draw out the Republicans. The Democrats may be trying to divide the Republican Party (GOP) by playing off the right wing (which includes the Tea Party politicians) against the moderate conservatives in hopes of forcing the GOP to come up with iron-fisted measures that would allow the Democrats to paint the Republicans as cold-blooded and cruel.

A likely scenario is that far-reaching reforms will be deferred until after the presidential elections in November 2012. The political climate in Washington has become so poisonous and partisan that both parties fear a catastrophic outcome of the presidential election if they fall foul of the electorate. Recent opinion polls are partly responsible for this angst. A large majority of respondents expressed the wish that deficits should be curtailed whilst simultaneously rejecting cuts in specific programs.

However, the parties cannot continue to stick their heads in the sand from now up to November 2012. If the federal government is to function during the rest of the fiscal year Congress needs to pass a budget resolution and raise the debt ceiling. That government will temporary grind to a halt is not unheard of – it happened twice in the mid-1990s. Yet it would be a mistake to assume that the Republicans won’t think twice about switching off the lights in the government buildings in the belief that the people will automatically blame the party occupying the White House. In 1995, the Democrats were also in power yet voters largely held the Republicans responsible for the government shutdown.

The parties may remove the obstacles that could stop the federal government from operating in the short term. However, we doubt if they will tackle the essential issues. Lawmakers are shouting at the top of their voices that the US should pursue a sustainable fiscal policy but there are five extremely costly achievements of the (welfare) state that no politician would dare touch. We’re talking about the military, Medicare, Medicaid, rebates and other tax breaks plus, albeit to a lesser degree, Social Security. 

Perhaps the two parties will finally muster the courage to reform those spending areas and safeguard the sustainability of the US welfare state after the presidential elections. Yet if the Democrats and Republicans fail to strike a Grand Bargain the markets will be merciless. The US will end up in a vicious circle of mounting indebtedness, soaring interest rates, increasing interest payments, even more debt, and so on. Until the start of 2013 the markets may still show patience towards the US but once it turns out that no major progress is made after the 2012 elections, they will rise up in arms.

In the end, both politicians and the general public will need to recognize that the welfare state is not sustainable in its present form. Not least because the population is aging, while untenable promises have been made and money has been squandered in the past.

Most right-minded persons must agree that the western model of the democratic-capitalist welfare state is coming apart at the seams. However, it seems that nobody is prepared to make great sacrifices to imbue a slenderized version of the welfare state with new life and ensure that the perspectives of the younger generations are not all gloom and doom. If the markets spring to action, they will demand hard choices. By then it will no longer be possible to implement gradual reform that is spread evenly among people over a lengthy period of time. Discontent and uncertainty will prevail while populism could become even more entrenched. This will make it harder to effect the necessary changes.

This negative scenario is not a given. Americans could acknowledge that the course the US has set for itself will irrevocably lead to the abyss and beyond. Ironically, Europe could help the Americans become aware of this. Especially if other weak euro countries are forced to go cap in hand to the stronger EMU states. The eurozone is shaking to its foundations, Europe’s population will age sooner, and its national debts are a heavy burden. Some countries are already weighed down with almost unbearably high interest charges. Yes, one could learn a lot from the bad example that Europe is setting. If the Americans take heed, there may still be time to avert disaster.

ECR Research (www.ecrresearch.com) is one of Europe’s leading independent macroeconomic research institutes focusing on the main currency and interest rate markets. The ECR reports reach a worldwide audience of sophisticated investors and treasurers and CFO’s within corporations and financial institutions. ECR offers a wide range of research products which are online accessible and updated on a weekly basis.

© 2011 Copyright ECR Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules