Recently, at a luncheon in Bangkok with a 2 of my colleagues the subject of the USA’s fiscal problem was the subject of our conversation, the following is a sketch of that discussion, as follows;

The huge federal budget deficit coupled with rising national debt of the United States is an uneasy issue in the US and throughout the World.
According to the US Budget Office’s latest forecast, the US budget deficit in Y 2011 is expected to reach US$1.6T, which is equivalent to 10.6% of the country’s GDP.

As of the end of Y 2009, the USA’s national debt had reached a record of US$12T, which equals to the sum of the annual economic output of China, Japan and Germany combined. According to the forecast, the accumulated debt of the United States by Y 2015 will increase by more than US$6T.

The US Congress has raised the debt ceiling 6 times during the last 3 yrs to keep pace with the country’s deteriorating financial situation. It is currently pegged at US$14.3T, but to put this into perspective, the debt limit was less than US$9T 3 yrs ago.

In a normal year, the US federal fiscal revenue is about 17% of GDP, among which the military spending, health care expenditure and Social Security cost each equals to 5% of GDP, aggregating 15% in total, the payment of interest on the debt alone is about 2% of GDP.

As a result of current runaway spending in the USA spending on many other important public services areas, such as homeland security, national higher education, and environmental protection has to rely on borrowings. Plus the massive rescue plan that the US Fed offered to the banking sector during Y 2009 is a further burdened to the US deficit.

Add to that, the financial situation of the US’s State-level governments is dire. Including California, the nation’s many States are on the verge of bankruptcy. Causing spending on police, education, public health, infrastructure and other public services to get squeezed because of inadequate funding.

The US debt structure consists mainly of two parts: part 1 is the Treasury bonds held by foreign investors, such as Japan and China; the part 2 is the Treasury bonds purchased through social security fund.

Over the next 20 yrs, the Social Security funds must be paid back as the Baby Boomers retire. Since this amount of capital has already been spent, resources need to be identified in order to repay this loan. That implies higher taxes to make up for the shortfall.

If the United States’ creditors start to sell off their US Treasury holdings in large amounts, the economic and political impact on America will be Big. The devaluation of their holdings associated with the massive sell-off will also put creditors in a major dilema.

China currently is holding about US$894.8B in US Treasury bonds, and they now appear to be making a wise move to diversify the investment portfolio and increase overseas expansion in natural resources ia timely manner, meaning it is happening Now.

On the other side of the World, i.e, the White House, the huge federal budget deficit amount, and the high unemployment rate are 2 difficult problems for the Obama administration. To address this issue, Obama has recently appointed four authoritative and qualified persons to oversee this Mission. Mr. Obama said: “The panel would have the latitude to consider any proposals to cut government spending and raise taxes.”

However, most analysts and keen observers are skeptical of whether this activity will have any effect whatsoever.

In the cross hairs of the US economy, the 2 most famous schools of thoughts have reached its nadir with the debate in terms of where the US economic policy shall go from here.

After all, the Keynesian approach of Big Government and economic stimulus policies has brought the US economy to where it is now, the Brink of Distruction.

The free market school advocates that the American people should cut spending and pay back debt first before going back to the growth path, this friend is way too difficult to implement. In particular, to attempt it in an election year with a 10% unemployment rate would cost the Democrats the loss of Key support from Main Street.

The broken political machine called the White House and long-term lack of collaboration from the 2 parties will not allow Obama any bold movements, and without bi-partisan support, it is easier said than done to solve the US deficit problem. So once again the Buck Stops at the Oval Office and a US President.

Paul A. Ebeling, Jnr. www.livetradingnews.com

Posted by Shayne Heffernan on Mar 2nd, 2010and filed underLatest News, The Hot List.You can follow any responses to this entry through theRSS 2.0You can leave a response by filling following comment form or trackback to this entry from your site