If you thought Italy
had sovereign debt issues, you should take a look at the United States .
Total public debt this week stands at nearly $17,000 billion, equivalent to 75%
of the value of the country’s annual output.
Half is owned by foreign investors, principally China and Japan . They are understandably
nervous. The once mighty dollar has fallen in value by 10% against major trading
partners’ currencies since 2009.
Good news for US exporters but bad news for those holding
dollar-denominated debt. Some suggest that the declining dollar is part of a covert global currency war
as the major capitalist nations desperately seek a trading edge over their
rivals.
But the US
federal debt mountain is about to come crashing down on the heads of ordinary Americans.
Barring a last-minute deal uniting the bitterly divided American political
class, a 10-year programme of cuts in federal government spending, known as “the
sequester”, is about to kick in.
Amounting to $1.2 trillion dollars, the automatic trigger mechanism
is the result of a decision by Congress in 2011 which was itself a compromise.
The Budget Control Act was the flip-side of a deal that allowed the
self-imposed limit on federal debt to be raised.
At the time it was argued that the effects of the automatic
cuts would be so unacceptably severe that the Congress would be sure to do
something to avert them. They’ve been delayed as much as was allowable, but the
debt crisis has worsened inexorably as the global contraction has tightened its
grip, and time’s up.
According to the Bipartisan
Policy Centre, “sequestration’s effect will be akin to that of a slow
motion train wreck. The uncertainty has already impacted economic growth, and
while there won’t be a sudden ‘cliff that occurs on March 1, the ramifications
will steadily worsen as time passes.”
Cuts for the seven months remaining in the 2013 financial
year amounting to $85 billion will be spread equally between defence and
domestic programmes. Getting a clear
understanding of the full impact
of the cuts on people’s lives and the effects on the services they provide
and receive, is proving difficult.
These are just a few of the expected headliners for this,
the first part-year of a – and I repeat - ten year programme of shrinkage:
- Economic growth (GDP) will be reduced by 0.5%
- Between 700,000 and 1 million jobs will disappear
- 800,000 defence department civilian employees face enforced unpaid leave of 20% equating to one day a week.
- $600 million to be cut from the Federal Aviation Administration mean that thousands more will be forced to take unpaid leave.
- The cuts could lead to the closing of hundreds of air traffic control towers
- 600,000 low-income people receiving help from the Women, Infants and Children programme may lose out
- Up to 70,000 children from low-income families could lose access to the Head Start programme
- military veterans and dependents of an active service member could be denied elective medical care
- thousands of teachers and aides could lose their jobs, and many special education and pre-school programmes could disappear.
Obama’s administration is in favour of reducing spending but
wants to do it differently, with a deal on tax increases for the wealthy –
fiercely opposed by the Republicans and the Tea Party. Tax cuts for the rich
introduced by President Bush were permanently extended as part of the deal
which temporarily averted the “fiscal cliff” at the beginning of the year.
Even with the sequester, the impact on long-term debt growth
is forecast to be small. The federal debt will continue to grow, until
eventually reaching 100% of GDP.
Warning to the American people: expect worse; much, much
worse!
Gerry Gold
Economics editor
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