While the U.S. has many economic strengths, it also has some eerie similarities to the struggling countries of Europe. Its budget deficit last year, equal to a whopping 8.6 per cent of GDP, was worse than the figures causing investors to take fright over the prospects of Spain, Portugal, or Italy.
President Barack Obama is expected to present a budget request to Congress on Monday calling for a deficit of $1.3-trillion (U.S.) in 2012, according to draft documents obtained by The Wall Street Journal.
Just how bad is the U.S. fiscal situation?
Capital Economics chief U.S. economist Paul Ashworth has issued a report with the provocative title “Are America’s fiscal prospects even worse than Europe’s?” which looked at the country’s growing indebtedness, political gridlock and horrendous budget deficits.
Here are some of Mr. Ashworth’s thoughts from an edited and condensed interview with The Globe and Mail.
You’ve raised the sensitive question of whether the U.S. is immune to the problems that have befallen Greece, Ireland and Portugal.
It is immune at the moment because its borrowing costs are low. The U.S. has a number of advantages but they’re not advantages that mean you can put off that day [of rising rates]forever. It’s quite possible that at some point the U.S. will see its borrowing costs rise.
How long will it take for U.S. debt to reach a crisis level?
This is an absolutely impossible question to answer. [Federal Reserve chairman]Ben Bernanke said something along the lines of ‘You don’t know exactly what the number is but you know since debt is rising we’re getting closer to the number.’
A lot of this is about confidence. You get a lot of people saying that the deficit doesn’t matter at the moment, debt doesn’t matter because borrowing costs are low today, but as any European country would tell you, borrowing costs today may not reflect your borrowing costs tomorrow. Once investors lose confidence in a government’s ability to repay its debt, things can go south pretty quickly.
Can the U.S. grow its way out of it debts?
This is the difficult one. Obviously it hasn’t happened so far. We’ve seen some better economic data coming from the U.S. but even if we get stronger economic growth it’s still going to be hard to get at the debt level because it’s now 70 per cent of GDP.
Can austerity solve the budget crisis?
It can but the problem is that austerity itself can damage economic performance. Nowhere is that more obvious than in Greece, but it’s also been the case in the U.K., Italy and elsewhere. Certainly you’d want to avoid a hard landing.
Might the U.S. try to inflate its debts away?
Beyond the next five years, certainly if you had debt still rising, the economy still weak, [there would be]pressure to try and solve this through inflation.
[Inflation is]the backup plan, the plan B. Nobody really wants to use it and it’s not going to be implemented any time soon, but you have to have it in the back of your mind that this is what might happen at some point.