The United States Facing Its Deficit

The United States, the number one global economy, faces a complex situation that will not be resolved quickly. With a fiscal deficit of more than 10 percent of its GDP and a gross public debt of more than 100 percent of its GDP, any country would be worried. The U.S. is no exception.

The American economy is recuperating gradually from the severe crisis of 2008. With a faster, though limited, growth (around 2.5 to 3 percent annually), a production even farther from its potential level and a slow reduction of unemployment, the view is still uncertain. The fiscal deficit continues to be very large, without an evident plan to reduce it to medium term. In a situation as unsustainable as this, many countries would be facing serious difficulties for financing themselves in the markets. European economies like Greece, Ireland or Portugal have ruefully learned it in these times.

Standard & Poor’s, one of the great risk-rating agencies, has just indicated, for the first time in 70 years, that it is putting the risk perception of the U.S. on negative alert, threatening to reduce its risk rating (which still continues to be Triple A, the best level possible) if the public debt keeps growing. That says enough, since the ratings agencies have been rather timid and not very wise in anticipating payment problems in the last few years: If they are reacting now, in part it means that the problem is already too advanced. The IMF has emphasized that the United States lacks a clear and credible plan to achieve greater fiscal sustainability and that it should react urgently. Various European countries also have high debts and deficits, but they have more convincing plans to go about reducing them.

The U.S. Congress recently came to an agreement, at the eleventh hour, on a minimum plan to approve the annual budget. To come to an agreement on more ambitious proposals to reduce the fiscal imbalance is more complex. The Democrats want to increase taxes on the wealthy (though they recognize that the middle class will also have to assume part of the burden), while the Republicans propose greater cuts to public spending. Without a minimum political consensus, a credible agreement will be difficult, even to raise the legal limit of the Treasury debt. If they don’t do it, at some point they will have to stop paying the debts, which would be a disastrous precedent.

Now, the United States has the unique peculiarity that its currency, the dollar, continues to be the principal channel of commercial and financial exchange on the planet. Despite all its problems, the dollar continues being a wealth reserve, and investors’ appetite for U.S. Treasury bonds continues for the present, which permits the U.S. to finance its debt at very low interest rates despite its serious economic problems. That delivers some oxygen while its problems sort themselves out, but it is not an infinite breather. The combination of the fiscal deficit with trade imbalances suggest that the dollar will continue to be a weak currency for a good while and that the interest rates will not rise very quickly. Someone else’s problems are sometimes the fortune of others: Ecuador, with a good deal of luck, should continue having a mild enough external environment.