Investors around the world are excited about the company’s earnings, which brings stock prices close to their highs. But, are revenues sustainable given the real situation of the global economy, where Fiscal deficits of most Western economies have reached unprecedented levels?
Some think that the recession is over and although the economies are not at their best, the world economy is recovering and the problems are manageable. Others believe that we are only at the beginning of a situation that will end badly when another financial collapse pushes the global economy towards a Great Depression.
Deficit a big hurdle for investors?
Fiscal budget deficits were not really considered a major problem by investors and economists before the recent financial crisis, because the sizes of deficits in general were not very high and interest rates were low.
Today, deficits in many countries have reached record levels due to lower federal revenues from slower economic activity and significantly higher spending from several government attempts to preserve jobs and finance rising unemployment. The result is that most countries are accumulating debt. Quick. What used to be an exception to unimportant economies has now become a global phenomenon.
Few years ago, Greece encountered serious fiscal problems that led to the creation of EU aid mechanisms for the weakest economies in the euro zone that found deficits exceeding 10% of GDP and near parallel debt rates or greater than 100% of GDP. Speculation about which member state would be next to ask for help led to a recovery of the US dollar against the euro, as nervous investors sought a safe haven in the debt of the US government, obviously believing that the fiscal problems of weak countries were They would spread everywhere. Europe.
Until now, Greece, Ireland and Portugal have been rescued on the condition that they reduce their deficits from about 10% to about 3% of GDP in a few years and also gradually reduce their debt to 60% of GDP over a period of 20 years. Other euro zone countries, such as Spain, Belgium and Italy also face similar sovereign debt problems. A future rescue of these countries could lead to serious difficulties for the EU to handle the situation, since the amounts required in these cases are much higher compared to the smaller economies that have already been rescued.
The European approach to dealing with deficits has been to take measures that gradually reduce deficits and debt levels without ending the fragile recovery, while in the US. There is no credible plan to control budget deficits over the next few years.
The fiscal position of the US federal government. (Not to mention many states) is very similar to that of the troubled economies in Europe that have been forced to seek help. The gross federal debt is close to 100% of GDP and the federal deficit is around 10% of GDP. Yes, such a large budget deficit is understandable and acceptable as a short-term result of a major financial crisis, but the economy has to get back on track as soon as possible. That goes for both Greece and the United States. The problem is the same. Only the absolute size of the problem differs.
Fiscal deficit financing
Who will finance the federal fiscal deficit of the US? Of more than $ 1.5 billion, considering that the Chinese have been drastically reducing their purchases of Treasury bonds in recent years, the Japanese have their own huge and growing deficit to finance, Arab oil-producing countries will be forced to distribute more wealth to their citizens to calm them down and the richest Europeans have their own weaknesses to care for.
Although there is still no fear expressed about a breach by the United States, there has been a clear depreciation of the US dollar against all other major currencies so far this year, despite the important geopolitical developments that historically always led to a stronger dollar. This is a clear warning signal that leads us to ask the question. Does the US government debt? It is no longer considered a safe haven?
Short view of us deficit
Since the Fed will soon end quantitative easing, which will lead to a slowdown in economic activity and, therefore, an inevitable deterioration of the US deficit. In the US, one can only expect politicians to be responsible in making the necessary but politically painful adjustments to the budget, starting today. Unfortunately, that is not very likely with the presidential elections next year.
So far, the Obama administration is confident that the annual real GDP growth for the next five years will be around 3-3.5% with an average inflation of 1.5%, calculating that the deficits will recede as the economy recovers. and that the problem should be solved. with when the United States and the world economy are in better shape.
That is a very dangerous assumption and there is absolutely no guarantee that things will happen in the way they expect. Looking at past recessions, it is not so unusual (8 of 11 times) that there are positive GDP quarters in the midst of an ongoing recession. Rising oil prices and Japan’s problems following recent natural disasters could easily cause economic deterioration from the fragile recovery. Or it could be something else. There is always something else.
At some point, the US credit rating. It must be reduced from the current triple A; otherwise, the impartiality and objectivity of credit rating agencies will be seriously questioned.
And so begins the show called “the negative spiral.” Higher interest rates, lower growth, higher unemployment and even higher deficits. We have seen the same show in Greece, so we already know the end. The big difference is that the US economy has the size and ability to drag the entire world economy down the drain.
My critical thinking
THE BIGGER THEY ARE, THE HARDER THEY FALL
So I wonder. Will the fiscal crisis that was born in Greece, also the birthplace of Western civilization, end with a funeral of capitalism in the United States?