by Piet Coetzer

US continues to face fiscal cliff

Global financial security continues into 2013

America continues to face a fiscal cliff in 2013

Between the end of 2012 and the beginning of 2013 America's fiscal cliff reached it's denouement. But more of the same is to follow. In the words of the New York Times, "... we will have many more showdowns (between Capitol Hill and the White House) and budget crises in the weeks and months ahead. In other words, cheer up for the worst is yet to come.”  

Barack Obama, only hours after a last-minute deal was struck, said that “if Congress refuses to give the United States the ability to pay its bills on time, the consequences for the entire global economy could be catastrophic.”

At the same time, across the Atlantic, European debt and related financial crises are showing few signs of abating. In the Pacific, there is growing concern about Japan’s immense and growing debt load. A quarter of that country’s budget already goes towards servicing its debt. 

The net result of all this is that at the start of 2013, the global economy is awash in a sea of uncertainty.

On the last day of 2012, the authoritative German publication Der Spiegel reported that theheads of major German companies admit that they have no idea what the future holds in store economically. Next year (2013) the situation could rapidly improve or decline. For many companies, the goal is to become as flexible as possible to prepare for any eventuality." 

Making forecasts has become virtually impossible and some commentators are starting to refer to an age of uncertainty.

Nature of the US crisis

For now and for the immediate future, the main focus is likely to remain on the American fiscal crisis.The deal that was struck between Obama and the Republican-controlled House of Representatives, led by Speaker John Boehner on 1 January, did almost nothing to address the big issues: booming entitlement spending, a tax code so complex that few defend it anymore and skewed spending priorities that have led to a grumbling American infrastructure. 

There was nothing to be seen during the procrastinating negotiations over the fiscal cliff at the end of 2012 of the American tradition of the 'grand bargain'. This is a fundamental feature of the US consensus-focused constitution. Its absence is a sign of a much deeper and more complicated, crisis besieging the American nation than just that of a national debt crisis.

Over the last decade, US politics has descended into a game of winners and losers between the two dominating parties of the presidency and the legislature, which more often than not are controlled by different parties. 

The deal that was struck to prevent a crisis, just postponed the inevitable, and will have to be redressed as early as next month. To avoid defaulting on its commitments, government will need to lift the debt ceiling. The Republican-controlled congress has already indicated it will attempt to leverage its consent to achieve spending cuts the president avoided in the previous round of negotiations.

The situation is similar to the one in 2011that led to the first-ever lowering of the US government’s credit rating by rating agencies. The recent deal only lowers the budget deficit by $620 billion while there is bipartisan agreement that what is really needed is a deficit cut in the order of $4 trillion.

This also points to a deeper American problem: an addiction to government debt. The country has drifted into its now patently unsustainable debt position thanks to the fact that the ceiling has been lifted almost every nine months since 1945. Debt has become the “American way of life.”

In more ways than one the US debt crisis is also not too dissimilar to what has been happening in Europe. In the words of the German publication Die Welt, “Essentially, America is more European than either Europeans or Americans think. Across the Atlantic, the economic crisis has opened up long-term structural deficits. And here too, the same phenomenon is emerging: In the post-modern Western democracies, the desire of citizens to receive social benefits is far more pronounced than their willingness to finance them with higher taxes".

But for the Americans, and to a large extent the globe, the real 'elephant in the room' is the fact that the main contributing factor to the deficit is US defence spending across the world. To date there is no sign that under the present 'total onslaught' mentality towards national security that this problem will receive any serious attention any time soon. The American fiscal problem is also by far not just one at a national level.

It goes down to the level of the states and local government. Also in this respect the American crisis, although under a different constitutional structure, shows strong similarities to what is happening in Europe.

It is clear that the global economy is set for a roller-coaster ride during 2013 with uncertainty almost the only certainty.

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Issue 392


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