Washington’s Self-Imposed Time Bomb

This year, the U.S. debt level might climb to over 100 percent of its GDP. In the view of most economists, the world’s largest national economy has brought this misery upon itself. Here are the reasons for its demise.

From the point of view of economists, the misery of the U.S. budget is a problem homemade in Washington. Holger Fahrinkurg, Chief Economist of WestLB, stressed that this is not the result of irreversible economic facts and circumstances, but rather the consequence of conscious political decisions. According to OECD estimates, U.S. debt could climb to over 100 percent of its GDP this year. In 2006, before the beginning of the U.S. financial crisis, it was at about 60 percent. The deficit is actually decreasing, but might remain at just under 10 percent in 2011. The primary deficit adjusted for business activity as well as the budget balance from income and spending without interest payments was 7 percent of GDP in 2010. In the euro zone, it was 1.1 percent.

With that said, the U.S. budget is not sustainable in the view of many economists. “Under President Bill Clinton, the budget was still in a position that the primary balance grew by about 2.4 percent per year,”* said David Milleker, chief economist of Union Investment. In the meantime, it requires a growth rate of more than 2.7%. During normal times, this would be feasible for the U.S. economy. Due to the ramifications of the crisis, some economists expect less growth yet again.

There are many reasons for the demise of the budget after the Clinton era: the costs of war and tax cuts under George W. Bush; as well as stimulus packages, the rescuing of banks in crisis and the recent healthcare reform under the current administration — all of this has caused the budget situation to deteriorate.

“The problem is that the income tax rates have sunk so much in the last ten years that now the income base for the nation is too low,” stressed Rudolf Besch, the U.S. expert at Dekabank. The radical wing of the Republican Party is fighting against tax increases and a series of economists is rejecting this type of consolidation.

Even so, the U.S., in contrast to countries like Greece, has an anchor. It can print its own money. In addition, the dollar is still a leading global currency. There is also another problem the U.S. doesn’t have: According to Fahrinkrug, “Should the European Central Bank no longer accept peripheral bonds as security due to their rating, the banks in these countries would be cut off from their supply of liquidity.”

This might be one reason why rating agencies and investors still value the U.S. over a European country in spite of poor budget data. “If the trust in U.S. capital markets dwindles to the point of the current trust in European peripheral countries, then the U.S. will be an actual ticking time bomb for the global economy,” said Carsten Klude, Chief Economist of M.M. Warburg. Like the scenario last week in Italy showed, this trust could also be lost through political warfare.