By: Dr. Mike Campbell
The US is the world’s largest economy, but it also has a mammoth public expenditure deficit which currently stands at $1.4 trillion and it is anticipated that it will hit $1.5 trillion in the course of the year. A trillion is a thousand billion; a 1 followed by twelve zeros and is a colossal sum – just one percent of a trillion Dollars is 10 billion bucks, so the interest payments on the US deficit constitute a veritable king’s ransom.
The IMF has cautioned that America must do something to tackle its deficit as its size risks causing instability in global financial markets. Any loss of confidence in America’s ability to service its debts would lead to a demand for higher yields on American government bonds, driving up the cost of US borrowing. This pattern has already been seen in Europe as Greece, Ireland and most recently Portugal have been put under the financial spotlight. There is no fundamental reason why the same scrutiny should not be applied to the US or Japan.
Speaking at the recent World Economic Forum in Davos, US Treasury Secretary Tim Geithner signalled that a growing number of US politicians recognised that the current situation has become untenable. "There is a much greater recognition across the US political system that our fiscal position is unsustainable in the long-run. I know there are people who would like to make very deep cuts that would undermine the recovery. You got to make sure that you don't hurt the recovery and take so much risk that you damage the early expansion by shifting too prematurely to substantial restraints. We're not going to let that happen. There are some people who like to move... very quickly to do very deep cuts in spending, but it is not the responsible way to do it." Clearly, the US will have to make the same painful decisions on stronger austerity measures that have already been put in place elsewhere.