America : Debt Unsustainable

Bharat Jhunjhunwala

No doubt, America actually believes in Charvak philosophy without acknowledging the ancient Indian philosopher. American economy is presently on the upswing. Reason is that present buoyancy is due to huge loans being taken by that country. The stimulus packages implemented by the US Government have put money in the hands of people. But this is not their own hard-earned money. This is a loan that the government has taken from the global investors. America is the largest and most open economy thus investors feel that it cannot go down under. But there is a limit upto which the US economy can sustain the debt. Sooner or later a tipping point will come and the US economy will again be engulfed in another crisis.

The debate in the US at present is about how much the Government may be allowed to borrow. Increased borrowing requires permission of the US Congress. Both major parties—Democrats and Republicans—had agreed last year to allow the Government to borrow more monies till an agreement could be reached. It was also provided that 20 percent across-the-board budget cut would come into effect if an agreement was not reached. This deadline expired on March 1st. As a result all US Government departments have been subject to reduction in budgets. There are fewer controllers on the airports and less support to the unemployed and the elderly.

This battle between the two parties assumes that the US economic crisis is only a short term affair. The country needs to tighten its belts till the crisis blows over. In reality the crisis is deeper and requires more forthright efforts to reduce the standards of living of the American people.

They say, this is part of the business cycle. It is created by an imbalance between investment and consumption. That does not seem to be the case presently because investment and demand are both falling. Less investment is taking place in the US as American companies invest in manufacturing and service operations abroad rather than at home. Manufacturing has shifted mainly to China while BPO and KPO operations are shifting to India in a big way. Simultaneously there is less demand because wages of American citizens are under stress.

Now it cannot be said with certainty whether new technological inventions will lift the US economy or not. The US continues to hold the lead in new technologies like i-pod and blackberry. However, indications are available that such may not happen. Knowledge Process Outsourcing-software, design, research and clinical trials-is shifting to India. Although the US corporations will still own the patents but the knowledge will certainly spread in the Indian economy in course of time.

The US economy had faced a short crisis of similar nature in the eighties when the OPEC countries had hiked the price of oil as has happened now. But the US economy soon rebounded. The dollars paid by US oil companies to the oil-exporters came back into the US as petrodollar investments. But this flow will be much less at present. The US dollar was the unquestioned leader in world currencies at that time and the US economy was strong. Presently the US economy is being challenged by China and others. Oil-exporters stand to take a huge hit if they invest their incomes in the US dollar. They will certainly diversify their portfolio which means that monies flowing into the US will be much less than previously.

The present American crisis is fundamentally different from the past on all three counts. Both investment and demand are falling presently; technological invention is being outsourced; and flow of petrodollars towards the US is weakening. The present flow of global money towards the US is due to the stimulus package implemented by the government. This cannot go on indefinitely. In this circumstance the present buoyancy is not likely to sustain and the US is likely to face a deeper crisis as soon as the level of debt becomes unsustainable.

Frontier
Vol. 46, No. 10, Sep 15 - 21, 2013

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