Let me start off with an analogy here. Consider an individual who doesn’t have the means to go on a holiday to Europe but goes for one by taking a loan. But then he wants to send his children for education to good colleges. So he takes an education loan. And he also wants to buy a car. So he takes an auto loan. Loans becoming such a predominant part of his life that he starts using one set of loans to fund his other set.
Something similar has gone wrong with Uncle Sam. US has never stayed within its means. Whether manufacturing huge gas guzzling cars or spending trillions of dollars on mindless wars (Iraq and Afghanistan), the US govt. has always lived beyond its means. One would think that the crisis of 2008 which was the beginning of the economic collapse of the world would give them some sanity. But then as they say common sense is really not that common.
US has accumulated a debt of more than US $14 trillion which is equal to the total value of the goods and services they produce in a year! Interestingly more than 40% of their spending today runs on borrowed money!! Can you believe that? A nation which calls itself the “superpower of the planet”, “an international policeman” and what not; runs partly on borrowed money.
They borrowed money through bonds from various countries and borrowed more bonds to fund these and so it was a vicious cycle which kept ballooning their debt to what it is today. The interesting aspect to the whole situation is the fact that the American debt ceiling has been increasing over the past decade. And Obama was against the increase in 2006. He’s the same one who has approved the current increase. Now through this problem America has delayed its problems not stopped it completely.
Uncle Sam could have increased taxes or cut spending. But since both were fraught with dangers, the easiest way out was to introduce more money into the system. Now this directly led to a reduction in the value of the dollar and goods appeared more expensive than before. Obviously they weren’t more expensive but the value of the dollar was less and so inflation appeared. Due to offshoring, unemployment has still been rising pretty rapidly which has led to a recession.
INFLATION + RECESSION = STAGFLATION
Today Standard and Poor (S&P) has lowered America’s credit rating to AA+ (riskier) from the coveted league of 17 nations who held the AAA (Safest debt securities) rating. This means that American debt is not the safest investment anymore for the people of the world.
Interestingly in between all this Obama has proudly proclaimed that they are still a AAA country despite what any credit rating agency proclaims. Hearing and reading such statements really makes you wonder what this guy is thinking and talking about. Can’t he see such a huge fiscal deficit in front of his eyes? Does he know that he’s living on borrowed cash? Does he know that on him depends the world’s condition? Does he know that he has built a huge bubble? Does his government care about people’s jobs, growth and prosperity?
China has locked trillions of dollars in US debt securities along with many others around the planet. Investors are really waiting with bated breath on whether the other two rating agencies – Moody’s and Fitch apply the downgrade too!
If that happens there will be complete carnage around the world!
I leave you with a thought – What would happen if US defaults on its payments?