A Shock of $14.3 Trillion

The enormous hole in the American public accounts, with a deficit of $1.5 trillion this fiscal year and counting, is far from new. In spite of this, Standard & Poor’s, a risk classification agency, spooked the market by lowering the outlook for the assessment of U.S. federal debt from “stable” to “negative.”

The shock on the stock market was fleeting, but the following day, the price of gold reached a record $1,500 per ounce. In spite of everything, there is clearly no risk of breaking the Treasury. The White House will not have to ask the International Monetary Fund for help, nor will it have to renegotiate with its creditors. The greatest of these, the Chinese government, held U.S. bonds with a value of $1.16 trillion in December.

China has the greatest interest in preserving the value of these bonds. No risk, then? That would be an erroneous conclusion. The negative American fiscal situation, with a deficit of $14.3 trillion at the end of March, is already a huge worry for the entire world. The more the solution is delayed, the worse the internal and external consequences will be.

The decision announced by Standard & Poor’s at the very least gave a more dramatic highlight to a problem exhaustively examined in the past week at the reunion of the IMF. The United States has the greatest fiscal deficit in the world as a share of the gross domestic product (10.8 percent this year), and the second-greatest need for funding, surpassed only by Japan.

In 2010, the United States government needed resources equivalent to 26 percent of its GDP to cover the fiscal deficit and its overdue debt. It will need 28.8 percent this year, and 25.6 percent the next, according to the IMF. The Japanese need will be greater because its national deficit has had more time to grow, allowing it to surpass the U.S. deficit. No European country, even the most indebted, will need loans so great in 2011 or 2012.

The U.S. government’s gross debt corresponded to 62.2 percent of its GDP in 2007, when the first signs of the credit bubble beginning to burst appeared. It rose to 94.6 percent in 2007, the worst year of the crisis, and should reach 99.5 percent this year. It will hit 102.9 percent of the GDP in 2012 and will arrive at 111.9 percent in 2016, according to the projections divulged in the past month by the IMF.

President Bill Clinton left the public accounts in good health upon leaving the government in January 2001. The following eight years, President George W. Bush devastated the U.S. budget with the combination of an enormous augmentation of military spending and the expansion of fiscal benefits for the rich. At the end of his term, he further amplified the fiscal shortfall with tax relief to banks and businesses hit hard by the crisis.

President Barack Obama inherited public coffers in tatters, but was forced to renew the package of fiscal breaks to prevent the recession from worsening.

The United States and other wealthy countries of the world will have to begin a long and painful housekeeping effort in their public accounts. Greece, Ireland and Portugal were forced to ask for help to avoid becoming insolvent. There has already been talk of restructuring Greece’s debt — until yesterday, at least, when all parties involved denied help to the country. In this environment, the commotion caused by the Standard & Poor’s announcement is understandable, although the emotional effect only lasted for less than 24 hours.

Still, the alert accentuated the urgency of a political agreement in the United States. A budget project of the Republican opposition was passed in the House of Representatives, but had little chance of passing in the Senate. Last week, President Barack Obama presented a plan to reduce the debt by $4 trillion in 12 years, a good starting point for a new negotiation between the two political parties. As long as the fiscal crisis lasts, U.S. monetary policy will remain loose and the markets of the world, including Brazil’s, will remain subject to this flood of dollars.

Standard & Poor’s decision applies mainly as a reminder to both U.S. parties: The fiscal situation is too grave for them to continue treating it as an election issue. It is imperative that they take care of this problem with the seriousness expected of them around the world.