America's Deficit: Double-Edged Sword, Indicating Future Risk of "Lameness"

Standard & Poor’s announced that they have degraded America’s outlook rating of AAA credit from “stable” to “negative,” which means that S&P will adjust and decrease the credit rating of the world’s largest economy in the next six to 12 months. At the same time, S&P claimed that the AAA credit rating of America would not change.

It’s hard to evaluate whether S&P’s lowering of the U.S. government’s credit rating is “objective” or not. But one thing is worthy of recognition, which is that the rating organization has seen the shadow behind the monumental recovery: There’s still no solution to problems like financial deterioration and heavy debts. It also seems that the U.S. persists in the old way of borrowing the world’s money and consuming the world’s resources.

“Twin deficits” have always been the most difficult problem to the U.S. government, and the U.S. remains the stumbling block to global economic recovery. America’s huge financial deficit is no more than a double-edged sword. If there’s no reduction of the deficit, the U.S. government will lose its credit and overwhelm the U.S. economy; but reducing the deficit will also bring uncertainty to economic growth, especially during the current recovery phase. Of course, the U.S. government hasn’t given up in making efforts to relieve the deficit.

Obama said in his deficit reduction speech that he would reduce the debt by $4 trillion in 12 years, will cut federal expenditure by 75 percent and increase tax revenue by 25 percent. Prior to this announcement, the two political parties reached an agreement on the budget for the 2011 fiscal year — cutting $38.5 billion from the $3.5 trillion budget in the 2011 fiscal year (due at the end of this September). The clarification of the deficit reduction plan indicate that Obama’s financial plan has suffered a huge blow; it could even mean that the cycle of financial restraint has begun.

Reducing the deficit may be regarded as the government’s endeavor to improve its balance sheet, to increase the U.S. government’s credit worthiness and market confidence for national debt and to reduce the market worry about federal government’s huge debt. But what is worrying is that once the cycle of financial restraint begins, the consequences may hurt the U.S. economy and weaken market expectation of economic recovery.

In order to break away from the shadow of the financial crisis as soon as possible, Obama has come up with a “dual strategy,” with the internal strategy to “remake” the U.S. through large-scale building up of infrastructure, including high-speed railways, public roads, next-generation Internet facilities, etc. These projects will doubtlessly provide abundant job opportunities for U.S. citizens and bring piles of orders for domestic enterprises. But now, with the start of financial restraint, stimulating the economy through large-scale infrastructure building will probably be aborted.

At present, the U.S. economy is recovering well and is realizing a self-sustaining recovery; one of the major contributing factors is the tax-reduction bill put forward by Obama before Christmas, which created a friendly environment for stimulating consumption in the U.S. However, before the complete recovery of personal balance sheets, the current economic power of personal consumption in the U.S. cannot compare with figures from before the crisis. If the financial stimulation is repealed too soon, it will cause, to a certain extent, a blow to the current burst of economic recovery. If U.S. economic recovery has depended on a two-legged strategy (through personal consumption and government expenditure) before the period of financial restraint, there runs a risk of the U.S. becoming “lame” in the future.