The U.S. Double deficit as the budget deficit and the current account deficit: some significant aspects as the comments to the article "U.S Debt crisis looms as debate rages on" by
John Smith.
John, thanks for the kindly given possibility to familiarize yourself with your
article.
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In your article you have specified the U.S. key debt problems which seriously complicate sustained country's economic and social development, carried out the express analysis of both the causes and the effects of the budget deficit and the national debt growth. You have also correctly noticed that «U.S. Debt crisis looms as debate rages on». The decision of economic and financial problems has appeared depending on a struggle course between two political parties. They haven't been disturbed by the bad situation for investors because of uncertainty around a question on a debt marginal level. Unfortunately, the main structural problem of the American and all world economy - the huge budgetary deficiency of the USA - isn't solved. Dramatic parliamentary struggle against a default didn't remain without consequences: the country rating has appeared under blow.
All interest rates in the world depend on profitability of the United States' Treasury securities. The decrease of U.S. credit rating will create forced sales of treasury bonds and inevitably entail the growth of cost of borrowed funds in the country. Thus Standard Poor's decision to downgrade the United States to AA-plus will lead to revaluation of risks all over the world and economic situation in Europe. Since Monday, on August 8th, the revaluation of risks on financial markets based on the purchase and sale of assets of countries and shares of their companies will begin. I don't think this revaluation will occupy for a long time.
The decision of Standard & Poors to decrease US credit rating will have the most considerable consequences for the economy of China as it is one of the main holders of the U.S. Treasury securities, and will also influence on the oil and metal markets. Amplifying risks of recession will be transferred by economy of China for the whole world, and now first of all it is necessary to look at the situation in oil and metal markets which have shown the greatest recession in crisis of 2008.
The accelerated growth of world economy in 2000-2008 at a rate of 5% per year has led to the considerable disbalance of world economic system, liquidity growth in global economy and the formation of asset bubbles. In addition an artificial surplus consumption was supported in one part of the world economy, and in another - an artificial surplus saving. Now a former disbalances comes back to the markets.
The U.S. current account deficit as well as compensating account of the capital proficiency of China, Japan and Germany grow again. It is really necessary for the balance of world economic system that one countries will pass from the surplus consumption to the more saving and others will spend on the consumption and change rates of the currencies.
The U.S. economy produces about 23% of gross world product (GWP) while a defense costs reach about 50% of the world defense costs. It is a global disbalance too. The status of the issuer of the world's reserve currency assumes the balanced macroeconomic policy and first of all budget deficit restrictions.
The growth of cost of loans will promote an inflation acceleration. It will probably increase tax revenues and soft a sharpness of debt problems, but can't solve them. Unfortunately, the solving of these problems demands on the acceptance of painful and unpopular measures such as the cutting of a defense costs and the increase of taxes, and it is hardly possible during the election campaign - the 2012 U.S. presidential race.
It is impossible to remain sitting at once on two saddles - the seat won't suffice :)... It is necessary to choose something one - geopolitical ambitions or a healthy economy and welfare of simple Americans.