Has the U.S. Economy Left the “Yellow Zone?”

“The yellow light is flashing” for the American economy; the executive and legislative branches of the government need to reject intra-party factions and do their job, as expected by the people, in order to avoid falling reaching a red light in the near future. That was the message from Barack Obama to the U.S. Congress. To guarantee being heard, for the first time in three months Obama gave a solo press conference at the White House, which he delivered in an unusually severe tone.

On the question of whether the economy would be in the red come August 2, the president did not give a direct answer because he did not consider it necessary to resort to tactics of intimidation. However, with serious data, he reaffirmed that this is a hard deadline and that the U.S. has “run out of tools to make sure that all our bills are paid.”

The deadline was set by the U.S. Treasury to raise the country’s debt ceiling. However, the political opposition in Congress refuses to consent to an increase in borrowing without large-scale concessions from the White House and, furthermore, states that it will only selectively continue to finance America’s debt obligations.

Such an approach would mean the U.S. government defaults on their loans, which would lead to disastrous consequences. This view has been raised many times by non-governmental experts and U.S. officials. For example, Secretary of the Treasure Timothy Geithner believes that this scenario is fraught with “crisis worse than the one we just went through.” By the way, Geithner has also informed the administration that this summer he may have to resign.

On the day of Obama’s press conference, Geithner publically appealed to the U.S. Congress to ask the IMF to raise the debt ceiling. According to his estimates, the United States runs the risk of a sudden increase in interest rates on their debts and a decrease in the sovereign debt rating if it does not take immediate action to bring its finances to order.

It is worth recalling that this spring Standard & Poor’s rating agency changed its long-term outlook for the U.S. sovereign debt from stable to negative. The agency previously predicted a one in three chance that the American debt and rating will be lowered over the next two years. Since then, its optimism has certainly not increased.

In fact, Obama’s statements were a continuation of the April policy speech on budget and finance that took place at the capital’s George Washington University. He stated that the “American Dream” would remain for present and future generations only if the United States learns to live within its means. To do this, the White House proposed to cut budget deficits in the country by $4 trillion over 12 years, as well as create a mechanism guaranteed to reduce the U.S. debt relative to the size of GDP beginning in 2014. At the same time, Obama insisted on keeping the social safety net for those Americans most in need, and on continuing to invest in education and innovation. This, he says now.

The ceiling of the U.S. national debt is already an exorbitant $14.29 trillion. Of course, for an ordinary person it is inconceivable to imagine such a wagonload of money. To clarify, experts estimate that one thousand dollars bills would produce a height of 1,450 km. Under Ronald Reagan in 1981, the U.S. debt in the same situation would only be 108 km.

According to Geithner, U.S. borrowing was approximately $125 billion over the last month. This is more than $4 billion a day, and $168 million per hour, approximately. It is greater, in today’s currency, than the price paid by America in 1867 to purchase Alaska from Russia.

Obama warned that without stabilization and reduction of the public debt, the interest alone on American debt will amount to $1 trillion per year at the end of 10 years. In addition, of the $4 trillion expected to be saved over the next 12 years, $1 trillion are simply interest. Another $1 trillion will provide tax reform (the president is convinced that rich Americans, including himself, do not need tax credits and they are ready to give them up). A portion of the budget expenditure must be reduced by about $2 trillion.

Of course, this is all conditional on an agreement with Congress. Dialogue between the government and legislators, which began shortly after Obama’s speech, revealed that they were trying to cut a diamond with a rock. Initially the White House entrusted everything to Vice President Joseph Biden. Later Obama himself began to get involved at the negotiations table and even on the golf course, but things are still where they started.

Now, it seems that on the budget and financial fronts that the last and decisive battle has begun. Obama has stepped up the intensity of populist rhetoric, stressing that it is unacceptable to pay for state-owned facilities, owners of corporate aircraft, or subsidies for oil and gas sectors at the cost of failing to support students from poorer families. The president also asked legislators to work weekends and holidays, and sarcastically remarked that if his school-aged daughters can get their homework done on time, rather than at the last minute, then “Congress can do the same thing.”

From its political opponents the White House calls for a balanced compromise. It is understood that each of the major U.S. political parties must make concessions that will be painful for the traditional electorates. For the Democrats, the difficulty will be reducing spending on special programs; for the Republicans it will be dealing with cutting tax benefits.

The White House asserts that it is ready to make concessions and will not spare even the “sacred cows.” That is, costs of the Pentagon and Medicare and Medicaid programs for the elderly and poor. The Republican reaction is quite strange. On one hand, some assert that America will default either way. On the other, former economic adviser to George W. Bush, Lawrence Lindsey, recently explained that the Obama plan is too optimistic.

In a problem-free end, the domestic fight in America would create interest from its international partners, including Russia. Our country has about $125 billion invested in U.S. Treasury bonds. China, a major U.S. creditor, has assets exceeding $1 trillion. Based on this I asked White House Spokesman Jay Carney whether he could guarantee that America would regularly pay its foreign debts. No answer was given, but he spoke generally optimistically.

“We remain confident that Congress will do the right thing,” he said, explaining that he had necessary steps in mind for “further implementation of our commitments and paying the bills”* In this context, “it is important to knock down some of the irresponsible talk out there” concerning the idea that “we could somehow pay some bills and not the other,” said Obama’s press secretary.

*Editor’s Note: This quote, although accurately translated, could not be verified.