The eleventh-hour accord on the US debt ceiling, touted with the usual bravado, showed frivolous disregard for market repercussions and left serious issues unaddressed. Small wonder that markets, concerned with a weak US business cycle, did not jump for joy.
It’s finally over. The US debt-ceiling deadlock was broken at the last minute as usual, one is inclined to say. Market participants, already pessimistic, can move on. Even before the deal was signed, worries were focused on the weakness of the business cycle after a dismal US growth pattern in the first half of 2011. Indicators show this hasn’t disappeared.
Party leaders trumpeted the debt ceiling agreement, but though it left no one really satisfied, no US politician will admit to being among the “losers.” As an observer I see at least three major long-term issues.
First and foremost, in my view, the debate blatantly showed a new “immaturity” in US politics. While brinkmanship and stubborn posturing may be good for your own electorate, it does nothing to reassure the international markets. Russian Prime Minister Vladimir Putin’s remark that “the US is living beyond its means like a parasite and the dollar dominance is a threat to the financial markets” echoes a view held by many emerging countries of the superpower international debtor. Chinese leaders advised the US “not to play with fire” but to find a solution. Pretending that the debt issue could be solved without increasing taxes is as childish as insisting that the current unfunded liabilities of the US government are easily manageable.
Second, while the agreement veers away from a technical default resulting in a precipitous tailspin in financial markets, a downgrade of the US credit rating by the major credit agencies has merely been postponed. By the end of this year the US debt-to-GDP ratio will exceed 100%. So far, no country has managed an AAA-rating at those debt levels. Even taking the “special” nature of the US into account as owner of the worldwide reserve currency, the debt-to-GDP level is so high that either the credit of the US must be downgraded or the credibility of the rating agencies will be in jeopardy.
Finally, as mentioned at the outset, the current business cycle situation in the US is dire. While many analysts and economists still believe that we will see a growth rebound in the second half of 2011, this appears more wishful thinking than fact-based forecasting. Moreover, even if the over USD 2 trillion in expenditure cuts inked into the debt ceiling deal do not immediately impact the US economy, the room for further fiscal impulse is almost nil. This makes extraordinary monetary impulses – even a full-blown quantitative easing 3 – more likely, especially if the US labor market does not improve significantly.
So no one should wonder that markets didn’t greet the “happy ending” of the debt ceiling with cheers. They are already focusing on the “ever after,” and it does not look rosy. No it doesn’t.
No comments:
Post a Comment