United States of America, supposedly the world’s strongest country (both financially and military wise) is into yet another problem after it just tried to get up after the Global Recession in 2008. Few experts say the problem can be solved while others say it’s a trap and another Financial Tsunami is ‘in the making’.
The United States Congressional Budget Office expects that the budget proposed by the Obama administration in February would add $3.8 trillion to the national debt between 2010 and 2020, the debt-to-GDP ratio will soar from 62 per cent to 90 per cent.
That $3.8-trillion net debt increase reflects a roughly $5-trillion increase in the deficit, owing to higher spending and weaker revenues from middle – and lower-income taxpayers. Well I don’t know the future but this is not so easy.
Swedish economists Andreas Bergh and Magnus Henrekson affirmed that, as a general rule, every 10-percentage-point increase in the size of government in wealthy countries reduces economic growth – by as little as 0.5 per cent a year, or as much as 1 per cent.
Let’s look what brings US to this stage:
Aggravation of Housing bubble:
Prices of houses increased by more than 100% between 1997 and 2006. Also interest rates reduced considerably. This led to homeowners refinance their loans and widespread use of complex products of CDOs and MBOs. By end of 2008, the prices declined by 20% and markets blasted
2004-06 saw a striking increase in U.S. Sub prime lending. Borrowers with weak credit histories with a greater risk of defaulting loan than prime borrowers, made good use of the easy credit conditions. This higher-risk lending also became one of the main causes of the economic downturn
The regulatory framework didn’t match the financial progress. Be it complex derivatives, structured products, shadow banking, off-balance sheet financing, these were not given required importance while framing policies. In few cases, laws were mended and enforcement made weak were equally responsible.
The government spending had increased to a large extent roughly around $6000bn in 2011. Sudden spikes in health and defense are major contributors to increased spending
Recently, Reuters writer Daniel Trotta headlined, "Cost of war at least $3.7 trillion and counting including The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11,
The Senate will now approve the deal to cut the country’s bulging deficit and lift the $14.3 trillion debt ceiling enough to last beyond the November 2012 elections.
So, does all this affect India?
India claims to be decoupled from external factors because of its consumption led growth but one could see how the markets behave when EU crises sharpened or US senate increased the debt ceiling.
The ripples are already observed in the economic survey report released yesterday as India’s expected GDP growth rate for 2011-12 estimated at 8.2% as compared to 8.5% registered last year.
Auto sales has already reduced as compared to last year, RBI hiking benchmark rates quarter after quarter surprising investors, Rising inflation is still a concern since past 1-2years. All these are signs of slowing economy
Is it just wait and watch or it is time for fiscal austerity?