Is the U.S. “Latin-Americanizing”?

Since the year 2000, the reference rate of the Federal Reserve (Fed) dipped below 6.5 percent to 1 percent (provoking the last economic financial crisis after excessive loans were handed out). It later increased to 5.25 percent only to finish close to zero, provoking a brutal increase of the monetary base in the last 12 months. Things being as they are, inflation constitutes a large problem over a long period of time, while the Fed has handed out record benefits (U.S. $52.1 million in 2009, 46.7 percent more than in 2008) in order to encourage the purchase of assets to add fluidity to the market. Furthermore, a large part of the stimulus package from Washington ($787 million) should be spent before June 2010. At the global level, the tremendous injection of funds is provoking a “recuperation” that would flow to the real economy in 2010.

But these stimuli are false; they do not respond to a demand of the natural market, but rather to an arbitrary decision of the politicians. With that they could be forming another large bubble. Meanwhile, we see that consumption and its consequences climb. The index of the Institute for Supply Management (ISM), a key indicator of industrial activity in the United States, climbed from 549 points in December to 584 points in January. The Purchasing Managers Index (PMI) in China, South Korea, Taiwan, India and the Eurozone ascended noticeably. Private employment in the U.S. decreased by 22,000 positions in comparison to the 61,000 that were registered in December of 2009, according to ADP Employer Services.

So, many believe that the U.S. economy should “expand” by 2.1 percent in 2010. Even when consumption is damaged by the unemployment rate of 9.8 percent, which could reach its maximum by June (more than 10 percent), but later drop. The American companies will increase their benefits by 30 percent and the European Stoxx companies by 28 percent.

But the budget for 2011 shows the grave fiscal problems of the best style of Latin American populism.* The freezing of the supposed spending promised by Obama rings familiar bells. The budget deficit beat records when it closed in 2009 at $1.42 trillion, equal to 12 percent of the GDP. The deficit in 2010 will reach $1.3 trillion. During the next decade, the accumulated deficit is projected to be $8.5 trillion, 2.5 trillion more than the congressional prognosis. If we compare Obama’s budget with the 2011 projections from Bush’s plan in 2001, it’s clear that the new projections are worse.

Thanks to the low rates, the U.S. is consuming more than it produces. That is to say, it has a deficit in its checking account, equal to 6 perecent of the GDP; it is considered a problem when it climbs over 3 percent. The debt of the U.S. government is climbing toward 64 percent of the GDP (it should be less than 60 percent for the E.U. according to the criterion of Maastrich). Washington owes a record debt of $12 trillion.

The health care reform bill, which is foundering in Congress, could cost up to $1 trillion in 10 years. To this you have to add the already ill-fated financial reform.

The two banks that most recently received stimulus money from the government gave back a refund. The standards of the Troubled Asset Relief Fund (TARP) didn’t please Citigroup or Wells Fargo, who are returning $45 million. Clearly the TARP failed. The banking entities and the hedge funds have continued to receive immense benefits for the business of high risk trade debt, and the banks (like JP Morgan, Bank of America and Wells Fargo) have grown. In order to patch up these issues, the legislative finance reform was made and is now in Congress.

Obama wants more separation between retail banking and trade operations. More severe restrictions will complicate Wall Street’s ability to obtain benefits, so their operations will become more expensive, which will carry over to the mass consumers. Furthermore, they want to limit the size of the banks. In conclusion, they want to defuse the incompetence in the banks. However, these settlements are a product of state regulations that inhibit competency.

*Translator’s note: My understanding of this sentence is that Obama’s spending is being compared to populist economic spending in Latin American countries.