Obama Surrendered; America Will Save at the Poor’s Expense

The president and Congress agree to raise the federal debt ceiling.**

Tension, caused by the complex negotiations between U.S. President Barack Obama and Congress regarding raising the debt ceiling, has somewhat lessened. The global financial community sighed with relief, “They’ve agreed.”

The United States’ technical default, which otherwise would have inevitably happened after Aug. 2, and could have resulted in a new financial cataclysm, has been postponed. It should be noted that the consensus was hard won and largely achieved through concessions from the president. Obama has agreed to accept a Senate group’s plan, according to which over ten years budget expenditures should be cut by $3.75 trillion ($500 billion of those cuts should happen immediately). Additionally, by abolishing several tax breaks, the treasury is expecting an additional $1.2 trillion.

The president had to make serious concessions. After all, the spending cuts will primarily affect health care and social insurance programs. Obama was unable to protect Medicare and Medicaid, which were the basis of his election campaign. The president will also have to accept cuts to the “sacred cow” of the U.S. budget: defense spending.

This does not mean that military spending would be drastically reduced, but as President Obama put it, cuts will be made to “discretionary” spending. Congress also agreed to return to the tax reform, a course of action that had previously been flat out refused by Congress.

During the previous weeks, the backdrop of oppressive uncertainty pushed the American market to the extreme. Immediately after the U.S. president’s press conference, during which the agreed-upon points were announced, the bulls rushed to buy securities, lifting the Dow Jones up to 12,587.42 points in one trading session (+ 1.6 percent). Prices of U.S. government bonds also increased (the yield on 30-year U.S. treasuries decreased to 4.2 percent). But it’s too early to rejoice because the sharp increase in response to positive news does not last for long. The U.S. is looking forward to a long and difficult recovery process, which should stop the economy from falling into the abyss.

According to Chief Economist of the Center of Development Valery Mironov, changing developmental structure is the most important area on which Americans should focus their efforts. After all, the latest crisis was not only financial and cyclical, but also structural. This means that there is now an active transition to new technologies, which is always accompanied by shocks.

Mironov believes that “companies that implement the old methods of production should go bankrupt and make room in the market for those who use a fundamentally new technology. In principle, the United States is doing everything correctly: It’s strongly investing in nanotechnology and biotechnology, and new energy. And it really needs to cut spending on social services. If the politicians finally agree, and make the cuts gradually, they will succeed. New economic conditions require that people no longer consume heavily, and begin to save and invest more.”*

Solving this problem will take more than the next couple of years. Moreover, it’s unlikely that Americans, who owe $16 trillion, will be able to quickly give up impudent consumption. Raising the debt ceiling is merely a formal measure. According to Chief Economist at Finam Management Alexander Osin, the debt ceiling is an outdated concept. Since the U.S. economy has been for a long time the accumulation of all the world processes, it has become supranational. The national debt of the U.S. economy merely reflects the general recession trend of the world.

Osin explained, “The credibility of this tool has long been undermined. Outright canceling it would help eliminate some of the short-term, local crises, like the one we are seeing now. This does not mean that America will borrow recklessly. But it also does not mean that it will cease to do it altogether. While the economy can not exist otherwise, it will work that way.”*

*Editor’s Note: The preceding quotation, although accurately translated, could not be verified.

**Editor’s Note: As of July 20, the debt ceiling was not officially raised; however, according to Bloomberg.com, the president was open to a deal allowing a short-term debt increase. Other sources indicate the proposal of a deal by Congress with stipulations similar to the ones mentioned in this article, but it is not officially associated with a debt ceiling deal. Please refer to the following sources for more information:

http://www.bloomberg.com/news/2011-07-20/debt-compromise-pressure-intensifies-in-congress-as-obama-resumes-talks.html

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201107211430dowjonesdjonline000537&title=lawmakergang-of-sixplan-never-meant-to-be-tied-to-debt-ceiling-deal