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Der Standard, Austria

Obama and the Fiscal Hole



By Andreas Schnauder

Translated By Sandra Alexander

08 November 2012

Edited by Tom Proctor


Austria - Der Standard - Original Article (German)

The Aging of US Society Will Drastically Increase the Debt Problem

If one used the stock market as a gauge for the economic impact of U.S. election results, the frustration could hardly be higher. The most important indices ended the day of going to the polls with a loss of considerably more than two percent, even though the victory of Barack Obama did not come as completely unexpected. A closer look at individual stock names shows that the six largest bank values had to get over a fictitious loss of $37 million – Bank of America was the top flop with a loss of seven percent.

Wall Street bet on the wrong horse, rejoiced star economist Paul Krugman. In fact, the elite of financial economy supported Mitt Romney politically and financially. Individuals from financial, insurance and real estate finance donated $53 million to the Republican candidate and thus almost tripled the contributions that went to the leader of the Democrats. One doesn’t need to be a prophet to conclude that Wall Street will have to resist stricter regulation in Obama’s second term.

Risky Transactions Restricted

Indeed, some reforms have already passed in Congress; a watering down will not be easy. The Democrats can keep their influence on the most important regulatory authorities. With the majority in the Senate and the veto card in the hand of the president, an all-too-great removal of the regulatory framework (known as the Dodd-Frank Act) that limits proprietary trading and risky transactions by banks, for example, will not be possible.

Whether Washington will make progress in the break-up of colossal financial conglomerates remains to be seen. In any case, the details show that the plunge in bank values may not have been too unfounded.

For the broad masses, the threatening expiration of diverse tax breaks that are not in the least due to the deadlock in Congress are much more central. To be sure, conciliatory talk was raised at the end of the election battle. But for the time being, there is no deviation from the extreme positions. It would not be a total surprise if the lowest common ground would once again have the greatest chance for consensus and the fiscal cliff would just be circumnavigated. The necessary means for labor market policies and education (especially for the lower social ranks) would be lacking one way or another, due not in the least to the questionable economic checks of Obama. With a lack of equal opportunity, the American Dream is in danger of finally deteriorating into an empty phrase - under a Democratic presidency, of all things.

Accumulation of Debt

As grave as the situation may already be, it is only the harbinger of even larger future encumbrances. Indeed, the aging of society is hitting the U.S. with full force, even harder than most European countries. According to expert calculations, the accumulation of debt will explode to over 400 percent of economic output by 2050 without countermeasures. Only Japan is in a worse position. The ratings agencies are chomping at the bit again. Obama had better not rely on financing government policy by the money printing press going well on an ongoing basis.



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