Tuesday, September 14, 2010

A Very Bumpy Ride

Exactly one year ago, chairman of RGE Monitor and economics professor at New York University's Stern School of Business. Nouriel Roubini (left) told CNBC that he saw the US economy facing “death by a thousand cuts”. And he even painted a frightening scenario where more than 1,000 financial institutions could fail before all is said and done (Webpage http://www.cnbc.com/id/32837255, posted September 14, 2009).

Even Boston University professor Laurence Kotlikoff echoed this sentiment: “Let’s get real. The US is bankrupt. Neither spending more nor taxing less will help the country pay its bills” (Webpage
http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html, posted August 11, 2010).

And it seems that the IMF is saying much of the same thing. Section 6 of the July 2010 Selected Issues Paper is advising that in order to close the US fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP” (ibid).

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

In very simple terms, what the IMF is really saying is that the US must run a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. And it’s not just for one year but for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

While doomsayers continue to pontificate about the US economy, it is a reflection of the dire straits that the US has found itself in when even US President Barack Obama has admitted in a White House news conference that progress in pulling the American economy out of recession has been "painfully slow" (Webpage
http://www.bbc.co.uk/news/world-us-canada-11265619, posted September 10, 2010).

While we can express skepticism about smart-alecks giving judgments on the US economy, numbers don’t lie!
The US government keeps trying to pump up the economy with debt, and in the process things are getting wildly out of control. According to a US Treasury Department report to Congress, the US national debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015 (Webpage
http://www.lewrockwell.com/spl2/15-economic-statistics.html, posted August 14, 2010).

The interest on all of this debt is becoming increasingly oppressive. As of July 01, the US government had spent $355 billion so far in 2010 on interest payments to the holders of the national debt. The total for 2010 should be somewhere in the neighborhood of $700 billion. According to Erskine Bowles, one of the heads of Barack Obama's national debt commission, the US government will be spending $2 trillion just on interest on the national debt by 2020. Keep in mind that the entire U.S. government budget is less than $4 trillion for the entire year of 2010 (ibid).

I happen to think that the US predicament is indeed grave. I keep asking myself. What if all the above reflect today’s and tomorrow’s reality?

And if the US gets clobbered good and proper, then the rest of the world will greatly suffer too. Including Malaysia. Some of us can still try to be positive, believing that at best, the world economy will face a protracted period of anemic, below-trend growth, but that the world will be none the worse for it. Can we afford to be optimistic?

Just to be on the safe side, it may be worth to pay heed to Roubini’s cautionary advice: “Fasten your seat belts for a very bumpy ride (Webpage
http://www.btimes.com.my/Current_News/BTIMES/articles/robono/Article/index_html, published August 16, 2010).

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