Economic recovery in the U.S. and elsewhere has slowed rapidly and private and some public forecasts are being downgraded accordingly. The Federal Reserve is sounding much more cautious, although they are not yet prepared to talk of further monetary easing. The most optimistic observers are now having to face reality. The massive stimulus packages did the job of stopping a self-feeding downward spiral but they have given us an artificial recovery.
Growth is now gravitating back towards 1% in the U.S. and Europe, close to what final demand has been. In the U.S. the inventory cycle has stopped adding growth, state and local governments are slashing expenditures and jobs, the nascent housing recovery has gone into reverse, and de-leveraging continues. Realistically, it is difficult to picture where any new growth surge may come from.
One of the most important implications of this dampened outlook is that government tax revenues will be disappointing and expenditures will remain elevated. The cyclical component of the deficit will remain high and the structural component will be hard to cut in a weak economic environment with unemployment likely to rise further.
The doomsday government debt dynamics depend crucially on getting economic growth above the rate of interest. That is currently close to 2% in inflation-adjusted terms against the likelihood of 1% real economic growth—a recipe for a continued explosion in the government debt:GDP ratio. It is currently close to 70% on a net basis on its way to over 100% in a few years. To get off that trajectory, the U.S. will have to slash the structural deficit and risk even further damage to economic growth.
Are the politicians up to the job? Not likely, until there is a fiscal crisis. Fortunately or unfortunately, depending on how you look at it, the U.S. does not seem close to such a crisis. With most of the rest of the developed countries and their currencies in bigger trouble, the world’s excess savings will manage to find a home, in good part, in U.S. Treasury securities, allowing the day of reckoning to be postponed by electorally motivated politicians.
Thoughtful people are not suggesting that the authorities slash the structural deficit now and in one shot. and it is seen that after the financial crises, countries experience weak growth for a long period, deficits remain high and debt:GDP ratios continue to rise.
However, that does not mean deficits should be neglected. They must be tackled credibly over time and on a sustained basis. If not, then an eventual crisis will provoke demands for a ferocious up-front slashing, as is the case in Greece and Ireland where GDP has or will drop 15% or more and the risk of social disorder spirals.
Hope you all like this article.
Always open for your valuable comments.....
-Champak
Growth is now gravitating back towards 1% in the U.S. and Europe, close to what final demand has been. In the U.S. the inventory cycle has stopped adding growth, state and local governments are slashing expenditures and jobs, the nascent housing recovery has gone into reverse, and de-leveraging continues. Realistically, it is difficult to picture where any new growth surge may come from.
One of the most important implications of this dampened outlook is that government tax revenues will be disappointing and expenditures will remain elevated. The cyclical component of the deficit will remain high and the structural component will be hard to cut in a weak economic environment with unemployment likely to rise further.
The doomsday government debt dynamics depend crucially on getting economic growth above the rate of interest. That is currently close to 2% in inflation-adjusted terms against the likelihood of 1% real economic growth—a recipe for a continued explosion in the government debt:GDP ratio. It is currently close to 70% on a net basis on its way to over 100% in a few years. To get off that trajectory, the U.S. will have to slash the structural deficit and risk even further damage to economic growth.
Are the politicians up to the job? Not likely, until there is a fiscal crisis. Fortunately or unfortunately, depending on how you look at it, the U.S. does not seem close to such a crisis. With most of the rest of the developed countries and their currencies in bigger trouble, the world’s excess savings will manage to find a home, in good part, in U.S. Treasury securities, allowing the day of reckoning to be postponed by electorally motivated politicians.
Thoughtful people are not suggesting that the authorities slash the structural deficit now and in one shot. and it is seen that after the financial crises, countries experience weak growth for a long period, deficits remain high and debt:GDP ratios continue to rise.
However, that does not mean deficits should be neglected. They must be tackled credibly over time and on a sustained basis. If not, then an eventual crisis will provoke demands for a ferocious up-front slashing, as is the case in Greece and Ireland where GDP has or will drop 15% or more and the risk of social disorder spirals.
Hope you all like this article.
Always open for your valuable comments.....
-Champak
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