USA is now competing against Greece - US Debt level is approaching 90% of its GDP while Greece Debt level is 120% of its GDP. Some studies have pointed out any debt burden exceeding 90% GDP is a long term growth deflator in view of the interest burden and repayment commitments.
Well Greece is accused of being spending too much and taken to task in international forums. It may be noted that the ultimate burden of the debt is felt on common people who lose jobs and face other economic hardships.
Let us see how US has built up this much debt
1) During Bush era, the costly Iraq and Afgan war commenced. Both cost about 2-3 trillion dollars and still bleeding. It is true that some of the American (oil) companies made big money in Iraq, but very little has been given to the US Govt in the form of taxes.
2) 2008 Financial Folly of "great American financial innovators' mixing toxic assets with good ones created one of the spectacular financial fireworks (crashes) in the human history. US Govt had to intervene, after the initial hesitation (that resulted in Lehman bankruptcy) which cost more than 2 trillion dollars.
3) Obama Administration's idea of extending social benefits of free health care etc also added a few trillions more.
4) Then there is the financial stimulus to kick start the economy also resulted in a few trillions to the US Debt
Overall it looks US policies were as good as Greece's! Hope US won't come work with 'financial innovation' or 'financial engineering" similar to the one that brought about the 2008 Credit Crisis.
There is no doubt that the US should cut its debt. The common sense says that it can be achieved by raising taxes and reducing expenses. But Republicans do not want to raise tax while Democrat (&US President) do not want to cut expenses.
Now there is every effort to increase the debt level with minimum tax increase and little cut in expenses. Such actions are meaningless. Without an effort to bring it down (which won't be easy) means the problem just gets postponed! US must take negative growth and unemployment for a few years rather than risking a 'debt crisis' in the future. The way it goes now, a future US debt crisis is a 'white swan'.
Will US debt crisis become a global crisis? Well, there are many who say that it could be a global problem. However there are a few who says it need not be. But it will accelerate the predictions (UN and IMF has already published papers) about the unavoidable move from US dollar as the world trade reference currency in global trade. A debt crisis by US will erode confidence in US$. Then China and India will buy oil from middle east and minerals from Africa in rupee and Yuan which will find acceptance from the exporting countries. Or they may prefer Euro. USD decline - which is their own making - is now not unavoidable, if any only if, US stop acting like a banana republic.
It is pertinent to note that Sterling was the global currency till 1950s. About 87% of the global reserves were in Sterling in 1947. After India got decolonized, the US dollar started its journey to become the reserve currency replacing Sterling. One of the reasons for this was the preference of former colonies to have non-Sterling currency as the reserve currency. Moreover US role in the global arena increased as they had great leaders like Roosevelt, which seems to be extinct in the current generation of US.
Well for investors, these are tumultuous times. It is better to trim down the exposure to the USD denominated assets.
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