China’s Dagong Credit Rating Co. downgraded the US government to a much more realistic A+ several months ago. After Greece, Ireland and Portugal it is now America’s turn to be pilloried for its budget deficit and national debt, respectively running at 10% and 100% of GDP. Despite these dire numbers and the hysteria that gushed from Democrats and Republicans on TV during this year’s marathon budget debate, the outcome actually made the whole business seem more a comic book: the $38 billion in spending cuts are a bad joke compared with the overall deficit of $1.5 trillion. President Obama won’t hear of slashing social expenditure with unemployment still rampant, and the Republicans want new tax breaks for their supporters. The 2012 election campaign has kicked off, and everything will now be dictated by awareness of it.
We were hoping the press conference that followed the last Federal Open Market Committee meeting would bring a bit of order and sobriety to all this frantic political posturing. Even a faint signal that the Fed was moving towards a semblance of monetary discipline could have given pause to the markets, to commodity speculators and to carry traders. But no such signal was forthcoming. Bernanke said that the Fed would implement QE2 in full, buying $600 of Treasury bonds, and that it would not budge on interest rates for some time to come. Keeping the fed funds rate near zero, a strategy backed by the idea that a negative cost of money will help bring down unemployment, can only breed more uncertainty. US mortgage rates have already increased substantially, so who would want to buy 10-year government securities at a third less than the going rate? And who, for that matter, would want to buy dollars if they continue to be printed in countless numbers? Small wonder that investors are bidding up hard assets like gold, silver, oil and property instead, to escape from currency devaluation. Silver is back up to the level it reached in 1980 when the Hunt brothers, from Texas, were trying to corner the market. This time however it is being used by Indian and Asian billionaires as a hedge against currency debasement.
America’s recovery is still struggling to gain traction for a fairly simple reason. In 1960 there were 15 million factory workers and 8.7 million civil servants in the US. Now there are only 11.5 million manufacturing jobs left, thanks to productivity gains, but the number of government employees has more than doubled to 22 million. As in many other industrialised countries, downsizing the public sector has become crucial to trimming the deficit. The only realistic way out of the debt crisis lies in redeploying resources massively towards sophisticated services and in streamlining the civil service to reduce its weight in overall GDP. Sweeping tax reforms are urgently needed as well. The elimination of tax niches and loopholes would help bolster tax revenues immensely. American companies have war-chests in other countries that are not taxed in the US until they are brought home. Wall Street outfits like Paulson, Caxton, Renaissance, SAC and Citadel are used to paying next to nothing in taxes, so to counter Obama’s planned increase in the levy on capital gains they have started amassing a huge campaign contribution for the future Republican candidate. Donald Trump, twice ruined and now a billionaire for the third time, thinks he has a chance. Washington lobbyists are in for a good year. (...)
Patrick Ségal - Trends May 2011