The above, shows (if you can make out the words, i know it looks ridiculously small) that the US is not going to be the next major economic casualty, after Greece. It just isn’t going to happen.
My knowledge on economics is supremely limited. So please bare that in mind!
Even the UK, which is in a far worse position than the US, is not even slightly as bad as Greece. We here in the UK have had two quarters of positive growth. I accept that given the bail out, and fiscal stimulus package, the growth figures are ridiculously low, but we are in a period of economic recovery. It is going to take a while to see the benefit.
The Office of National Statistics report revised their original estimate for growth in the fourth quarter, to a much higher figure. We are actually in a much stronger economic position in the UK, than we first assumed. Government spending was needed to prop up the economy during recession. But, given that we are still only in recovery, I believe it’d be a massive mistake to withdraw that support as the new Conservative government plans to do shortly. In fact, i’m not entirely sure where the benefit of withdrawing support now, actually is? I accept in the future, we need to cut spending. I think though, forcing tax evading corporations to pay what they owe, should be the prime target. But cutting now, seems dangerous. Surely, when we are a growing economy, and the World itself is growing economically, that then would be a good time to cut. Not when people are struggling the most. I fear that it is just Tories being Tories. Cut spending, give people the option “Work where ever we say, or lose your home and starve to death…… and work twice as hard, for minimum wage…lower if we had our way!!! Whilst we give your boss a tax cut, so he can enjoy another game of golf a week“, and eventually the Nation’s money pot may improve, at the expense of social cohesion and morale.
Fox News today asked if it were possible, that the U.S could become Greece economically. They all answered “yes“. Scare tactics.
So I did some research, on the fundamental differences between the economy of Greece and the economy of the US.
To fill the hole in the budget, both Greece and the US need to find around 6% of GDP, according to a report by economists Auerbach and Gale. My limited understanding of economics tells me that just because that number is true for both Nations, the measures needed to fill the gap, are nothing like one another.
Greece’s budget deficit is 14% of it’s GDP. America’s is 9.3%. They are both pretty harsh figures, I accept.
National debt in the US is apparently likely to hit 140% of GDP in the next twenty years. That doesn’t take into account policy changes, technology advancements, or any other sort of externality. It does not take into account growth as a result of investment in infrastructure etc. That figure simply goes by what it would be, if twenty years from now, were the same in every way, as today.
Spending cuts, tax raises are obvious. But they do not need to be harsh as they do in Greece. Greece is in a far worse position. The US’s economy is growing, whilst Greece’s economy is shrinking. In order to protect itself from bankruptcy, by appealing to the IMF for a loan, Greece is being forced to reduce spending. Reducing spending during such a huge recession, is only likely to make that recession far worse. America is not in recession. It does not have to appeal to the IMF for a loan, it is not likely to fall back into recession any time soon. The growth will eventually provide the revenue to fill that 6% gap. When the US economy picks up, then spending cuts and higher taxation will further help the US bring down its cyclical deficit.
The US dollar is still strong. Despite growing deficit and debt levels, the US is in a prime position to deal with its problems, because the dollar will be the leading currency for many many years. America is the largest economy in the World. Greece, is the 27the largest economy in the World. And whilst China is growing, it is not in a position to catch up to, or overtake America for quite some time. Investors simply do not trust the Chinese all that much, whilst at the same time, investors flee Greece. Whilst reserve currency status is not guaranteed to last, it certainly provides protection for the US, which provides 60% of the World’s reserve currency.
Greece has to fill that gap within the next year. If they don’t, they risk pushing Greece into an even greater recession, which will inevitably lead to even greater structural deficits. Greece is in a mess. They ran up huge budget deficits during the good economic times. They inevitably ran up even larger budget deficits during the bad times. Greece’s structural deficit is horrendous. America’s, is not. The structural deficit in the USA is not perfect, true. And it is going to take some harsh measures over the next few years to help. But, the US can fill that 6% gap, over two entire decades. Greece has two years at the very most. It is also worth pointing out, that it was the Republican Party, the party of fiscal responsibility that spent away their budget surplus during the good times. And not in a positive way either. It was not Obama. America needs to simply slow down a little, not drastically cut.
America obviously has to change over the long term, whereas Greece has to change immediately. The problem America has, is its particular brand of Capitalism; irresponsible consumerism. Growth for the benefit of growth. Wall Street offering no real social good. They simply exist to fatten their pockets. Your money, placed in banks, being used in dodgy dealings, rather than productive investments. Responsible Capitalism, in which the success of a Nation is in measuring how low the inequality gap and how low the poverty rate is, rather than the accumulated riches of the very wealthy. That is the only way the entire World will escape another preventable Global recession.