Tuesday, August 02, 2011

American Debt Crisis - Sustainability of US/World Finance

I heard this from a CBC's financial analyst this morning:

The American debt is now 100% of the country's GDP. The US will need a growth rate of 2.5% to sustain its finance, a scenario that is unlikely to happen given the on-going economic downturn.

My thoughts:

After the US Senate vote, both Democrat and Republican/Tea-Party hardliners will need to further collaborate and compromise to deal with this long-term sustainability issue. Some things need to give: Medicare? Military? Social-welfare? Taxation? Standard of living? Owning a home? Education? Outsourcing? Wages? Pension? ....

At some point, you can't have the cake and eat it too. The so-called win-win solutions are harder if not impossible to find !! It's sad to say, but the American Dream for the next generation might have to be downgraded from the gold-plated triple A's, if no long-term debt reduction solutions are found.

Given that the US is Canada's neighbour and major trading partner, whatever happens to next generation Americans will have a ripple effect north of the border.

While the Canadian economy is relatively strong now, we too are facing long-term sustainability issues in areas such as our health-care system (ageing population; new immigrants; ...), infrastructure (highways and bridges literally falling apart; wastewater treatment plants not in compliance with proposed federal CEPA/FA regulations; ...), global competitiveness (innovations, productivity, skilled labours, ...), aboriginal communities across Canada, etc.

Is this the beginning of a irreversible power shift from the west to the east? Or has it happened already? Is the US becoming the "parasite" of the world, as Russia's Prez Putin so joyfully rubbed it in? Will changing/moving the world's reserve away from the US dollars solve the world's financial inter-dependency problem? How abt Canada? Where do we sit in all these?

As CBC's Q says: "Happy Tuesday ... To be continued".
Sent from BlackBerry


the inner space said...

HBB so did you go across the border to maximize your shopping budget?

Anonymous said...

Everything has to be cut. I am ok with it. How can we have decades of over-spending with no painful consequences? The U.S economic growth is going to be flat for a long time. I am glad I don't have kids.

I am lucky enough to have my "American Dream". I'm willing to pay more taxes if I am asked to. Services will be cut. That's fine. There is a lot of wasteful spending in this country. Time to trim off the fat. By the time they come up with the plan for spending cut, I heard 2 million more jobs will be lost. Our standard of living is the highest in the world. Let's face it. Do we really need one car per person? 3,000 sq ft homes? 70+ anti-poverty programs? I think Americans will adjust just fine.

I am not sure about the rest of the world? Can they afford to lose the biggest buyer/spender in the world?


Anonymous said...

Speaking of "rubbing in", oh, it has been interesting to see how overnight America becomes the biggest loser in some people's eyes! When you are down and low, people despise you; when you are rich, people are jealous of you. Funny though, Americans don't really care about shame or "saving face". "Parasite" may sound a bit harsh but we can take a joke while the rest of the world criticize away :)


the inner space said...

Fitch,Moody,remained triple A
S&P gave AA+ 。

大公國際 Dagong global credit rating

【大公國際】Dagong has downgraded the local and foreign currency long term sovereign credit rating of the United States of America (hereinafter referred to as “United States” ) from “AA” to “A+“, which reflects its deteriorating debt repayment capability and drastic decline of the government’s intention of debt repayment.




Haricot 微豆 said...


All my shopping are for the basics. At this point, I don't need anything extra that will make me go thru the trouble of driving down and crossing the border !!!

the inner space said...

Alan Greenspan, Former Chairman of the Federal Reserve: "Very much so. This is not an issue of credit rating, the United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default."

Haricot 微豆 said...


>> .... Everything has to be cut. I am ok with it.

During Canada's "stagflation" years, then Prime Minister Trudeau actually passed legislation to limit public sector wage increase to 6% and 5% for two yrs. There were lots of complaints because ppl were not willing to sacrifice, but in the end the collective good was largely achieved.

I think history is repeating itself. Instead of stagflation, the US might have a balance-sheet recession and tough measures and sacrifice will be needed to get the country out of the situation. The era of entitlement to whatever dreams or promises is over, at least for now!!!

As to your last question: "Can they afford to lose the biggest buyer/spender in the world?"
I would think the answer is "Yes", if a country has a strong domestic market; and "No" if its economic growth is depending too much on export.

Ref: Wikipedia / http://en.wikipedia.org/wiki/Stagflation / Stagflation

".... In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate is low. It raises a dilemma for economic policy since actions designed to lower inflation may worsen economic growth and vice versa. The portmanteau stagflation is generally attributed to British politician Iain Macleod, who coined the phrase in his speech to Parliament in 1965. The concept is notable because, in Keynesian macroeconomic theory which was dominant between the end of WWII and the late-1970's, inflation and recession were regarded as mutually exclusive, the relationship between the two being described by the Phillips curve. In addition because stagflation has generally proven to be difficult and, in human terms as well as budget deficits, very costly to eradicate once it starts...."

Ref: Wikipedia / http://en.wikipedia.org/wiki/Recession / Balance sheet recession

".... The bursting of a real estate or financial asset price bubble can cause a recession. For example, economist Richard Koo wrote that Japan's "Great Recession" that began in 1990 was a "balance sheet recession." It was triggered by a collapse in land and stock prices, which caused Japanese firms to have negative equity, meaning their assets were worth less than their liabilities. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy...." (Haricot: And if the govt does not have any money to spend ... BIG trouble !!)

Haricot 微豆 said...


It's the 1st time I heard of Dagong. Thx for the info, the English version of which is shown below for my own reference.


(English version: http://en.wikipedia.org/wiki/Dagong_Global_Credit_Rating )

Dagong Global Credit Rating (大公国际资信评估有限公司; pinyin: Dàgōng Guójì Zīxìn Pínggū Yǒuxiàn Gōngsī) is a credit rating agency based in China. It is one of the few notable non-US based credit rating agencies. It is recognized as a credit rating agency which gave the US debt a lower credit rating than that given by the three traditional rating agencies Moody's, Standard and Poor'sand Fitch. The U.S. Securities and Exchange Commission has refused to recognize Dagong's ratings because of the commission's inability to supervise the Beijing-based agency. Dagong claimed it was being discriminated. Dagong's ratings are often different than those of the Big Three e.g. Ratings for China, Russia and India are consistently suprior than those of US, UK and Germany.

Haricot 微豆 said...


>> .... Speaking of "rubbing in" .... When you are down and low, people despise you

Some ppl are speculating that the US will fail economically and then collapse like the USSR. If that happens, Canada will be in BIG trouble !!!

Haricot 微豆 said...


>> .... the United States can pay any debt it has because we can always print money to do that.

Did Alan Greenspan actually say that? Printing more funny money would be just that, more funny money with no real added value !!!

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