Global Crisis/Innovation Blog

America in Crisis: Political Gridlock, Leadership Vacuum, and an Accident Waiting to Happen

By Shlomo Maital

  America’s Debt Mountain


America’s government has run out of money. Unless Congress passes legislation to increase the legal ceiling on the debt the U.S. govt. can owe, by August 2, parts of the federal government will shut down. At a time when the economy is teetering already on the brink of a double-dip recession, this will be disastrous. 

  The Democrats and the Republicans are deadlocked. The Republicans want massive spending cuts. The Democrats want higher taxes on millionaires.  Neither side will budge. 

  Somehow, America’s budget deficit must be cut. According to The Economist, the deficit is 9.1 per cent of GDP.  In contrast, Greece’s budget deficit is only 8.4 per cent of GDP – and Greece is deep in crisis.  America’s trade balance in April was (at annual rate) $681 b. (the gap between goods exports and goods imports).  These two deficits are massive and endanger not only America and the world.  Yet there is political gridlock.

     It gets worse.  With Asian economies recovering, there is growing demand for capital and this is leading to higher interest rates. A year from now, short-term interest rates in the U.S. will be two per cent higher.  America does a lot of short-term borrowing. On its total national debt of $15 trillion, a rise of two basis points in interest costs amounts to $300 b. in added spending!  The historical average interest rate on America’s debt is 6 per cent. At present, the U.S. is paying two percent.  So if you factor in the higher cost of borrowing, America’s deficit is getting worse, not better.  And as expert Eugene Bowles notes:  This (debt crisis) is the most predictable crisis in history – yet the politicians in Congress cannot sit down and agree on a plan of action. Obama and the Democrats are as much to blame as the Republicans.  It is an accident waiting to happen. 

  When Greece is in crisis, the euro becomes shaky. When America is in crisis, the whole world becomes shaky, because the American dollar is still the only global currency.  Contrast America’s political gridlock with China, whose Premier Wen Jiao Bao, on a visit to Europe, has pledged China’s resources to buy Greek bonds.  He realizes it is not in China’s interest to have a euro crisis, or indeed a crisis of any kind.  Imagine the irony – China is acting to bail out the euro, while Germany’s narrow self-interest is endangering it.   

    China gets it.  America’s politicians do not.  And all we ordinary citizens of the world can do is sit and watch America and the world fall of the cliff….