Edited by Patricia Simoni
The American Debt CrisisExacerbates Political Tensions
Published in Le Monde
(France) on 9 August 2011
by Pierre-Cyrille Hautcoeur (link to original)
The American public debt crisis has been treated in France as a political deadlock, provoked by radical Republicans, that obstructs a simple, technical solution. If the deadlock is real, the solution is not simple; and this deadlock is not one that can be resolved quickly.
The situation of American public debt is much more serious than that of the big European nations: The deficit remains considerable this year, at nearly nine percent of the gross domestic product (GDP), which is almost a third of federal spending. If we add to the federal debt the debts of the states and local counties (as we have done for Europe’s debt since the Maastricht treaty), we greatly exceed 100 percent of the GDP, at a rapidly growing rate.
But it gets worse: The structure of the debt and the current level of interest rates mask costs that risk exploding. Interest rates on American public debt are the lowest ever recorded for any borrower at any moment in history: Never have short-term rates descended below one percent, which has consistently been the case now for three years, and up to periods of close to five years.
The average length of the American debt being short, about five years in theory — four, if one considers the long-term debt redeemed by the U.S. Central Bank (the Fed) in the framework of the “Quantitative Easing 2” program, or QE2 (the second financial reflation plan, of 600 billion dollars/413 billion euros) — the budget profits fully, from now on, from a debt that is almost free. The flip-side of this is that interest rates will explode, from the moment that taxes rise, which would significantly affect the budget.
The brevity of the length of the debt presents another major disadvantage: It puts the U.S. at the mercy of a crisis of confidence. In the case of a deadlock of budgetary debate or, more widely, of a domestic or international political crisis, the simple absence of renewal of Treasury bonds could lead to a treasury crisis.
This situation would most likely occur, if the Fed continued to buy back the public debt massively beyond that which the economic situation requires, and were, therefore, suspected of monetizing the debt voluntarily.
The expectations of inflation (currently minimal, as measured by the indexed obligations, valued at 2.2 percent per annum for the next 10 years) and the expectations of the depreciation of the dollar could, therefore, increase brutally, and the creditors (especially foreigners) could refuse to renew Treasury bonds, save for prohibitive taxes.
American stockholders would, therefore, undoubtedly have the choice between an inflationary tax and a rise in taxes. This situation has been seen in many severely indebted countries following the two world wars, and these experiences will show that it is difficult to stabilize an inflationary boom in situations of acute internal political conflict.
Now, the political tensions exacerbated by the tea party are likely to endure, for they have deep roots and no simple solution. According to numerous analysts, the political division of the U.S. has not been this strong since the end of the Civil War, in 1865. That war, which began just 150 years ago, set in opposition two societies that had gradually diverged. Slavery constituted, of course, the principal motive of the conflict, but it was only a catalyst.
In the North was an alliance between industrialists and individual farmers, resting on high salaries permitted by industrial investment, mass education, and the distribution of the “virgin” lands of the West to the pioneers. Industrialization depended on technical progress, natural resources, and protectionism.
In the South, a society dominated by slave-owning aristocrats refused education and the support of industrialization, to the benefit of an agriculture, the profitability of which depended on slavery and free exchange.
Today, the fronts have changed: The cultural elite of the Atlantic and Pacific coasts (as well as the Great Lakes) — globalized, innovative, and post-industrial — are opposed to the middle classes in the center and south of the country. The latter are stuck in obsolete specializations or an agriculture with an intensive model that is drying up; their cultural insularity and a wave of conservative evangelical renewal leads them to rebel against globalization and against the federal state.
This tension is deeper than that of Europe, and its effects are heightened by its strongly regional character, which could lead to real deadlocks in Congress.
These real financial difficulties, like these political tensions, undoubtedly justify the degradation of the U.S. dollar by Standard & Poor's, which one can hope leads to a jump-start. The solutions are known: restriction of exaggerated and ineffective spending for health care, as well as military programs, and increased taxation of high revenues, currently under-taxed. But the most powerful lobbies oppose this, for the moment, with success.
We hope they will understand that, before even the distribution of costs, their primary interest is the maintenance of U.S. economic and political stability.
The situation of American public debt is much more serious than that of the big European nations: The deficit remains considerable this year, at nearly nine percent of the gross domestic product (GDP), which is almost a third of federal spending. If we add to the federal debt the debts of the states and local counties (as we have done for Europe’s debt since the Maastricht treaty), we greatly exceed 100 percent of the GDP, at a rapidly growing rate.
But it gets worse: The structure of the debt and the current level of interest rates mask costs that risk exploding. Interest rates on American public debt are the lowest ever recorded for any borrower at any moment in history: Never have short-term rates descended below one percent, which has consistently been the case now for three years, and up to periods of close to five years.
The average length of the American debt being short, about five years in theory — four, if one considers the long-term debt redeemed by the U.S. Central Bank (the Fed) in the framework of the “Quantitative Easing 2” program, or QE2 (the second financial reflation plan, of 600 billion dollars/413 billion euros) — the budget profits fully, from now on, from a debt that is almost free. The flip-side of this is that interest rates will explode, from the moment that taxes rise, which would significantly affect the budget.
The brevity of the length of the debt presents another major disadvantage: It puts the U.S. at the mercy of a crisis of confidence. In the case of a deadlock of budgetary debate or, more widely, of a domestic or international political crisis, the simple absence of renewal of Treasury bonds could lead to a treasury crisis.
This situation would most likely occur, if the Fed continued to buy back the public debt massively beyond that which the economic situation requires, and were, therefore, suspected of monetizing the debt voluntarily.
The expectations of inflation (currently minimal, as measured by the indexed obligations, valued at 2.2 percent per annum for the next 10 years) and the expectations of the depreciation of the dollar could, therefore, increase brutally, and the creditors (especially foreigners) could refuse to renew Treasury bonds, save for prohibitive taxes.
American stockholders would, therefore, undoubtedly have the choice between an inflationary tax and a rise in taxes. This situation has been seen in many severely indebted countries following the two world wars, and these experiences will show that it is difficult to stabilize an inflationary boom in situations of acute internal political conflict.
Now, the political tensions exacerbated by the tea party are likely to endure, for they have deep roots and no simple solution. According to numerous analysts, the political division of the U.S. has not been this strong since the end of the Civil War, in 1865. That war, which began just 150 years ago, set in opposition two societies that had gradually diverged. Slavery constituted, of course, the principal motive of the conflict, but it was only a catalyst.
In the North was an alliance between industrialists and individual farmers, resting on high salaries permitted by industrial investment, mass education, and the distribution of the “virgin” lands of the West to the pioneers. Industrialization depended on technical progress, natural resources, and protectionism.
In the South, a society dominated by slave-owning aristocrats refused education and the support of industrialization, to the benefit of an agriculture, the profitability of which depended on slavery and free exchange.
Today, the fronts have changed: The cultural elite of the Atlantic and Pacific coasts (as well as the Great Lakes) — globalized, innovative, and post-industrial — are opposed to the middle classes in the center and south of the country. The latter are stuck in obsolete specializations or an agriculture with an intensive model that is drying up; their cultural insularity and a wave of conservative evangelical renewal leads them to rebel against globalization and against the federal state.
This tension is deeper than that of Europe, and its effects are heightened by its strongly regional character, which could lead to real deadlocks in Congress.
These real financial difficulties, like these political tensions, undoubtedly justify the degradation of the U.S. dollar by Standard & Poor's, which one can hope leads to a jump-start. The solutions are known: restriction of exaggerated and ineffective spending for health care, as well as military programs, and increased taxation of high revenues, currently under-taxed. But the most powerful lobbies oppose this, for the moment, with success.
We hope they will understand that, before even the distribution of costs, their primary interest is the maintenance of U.S. economic and political stability.
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