From an entertainment point of view, the US presidential race is becoming
steadily more interesting, even exciting, as we come into the final stages. The
debates between the candidates generated a lot of hot air from the candidates,
money for the networks and material for the stand-up comedians, but they
certainly seem to have made the contest more intense and the race much
But the object of this exercise in democratic discussion is
supposed to be to see which of the two candidates is better suited and better
qualified to hold the most powerful position in the US and maybe the world. You
can argue, plausibly, that if these two men are the choice being presented to
the American people, then treating the race as entertainment is the preferred
option – laughing instead of crying. But come November 7, or the inauguration if
there is a new president, the show will be over, while the grim reality that is
the US economy will still be there, in all its pristine ugliness.
you look at the overall picture of the American economy and get past all the
hype and self-serving blather from brokers and investment banks about the
“recovery,” there is one issue that dominates everything else: The deficit in
the government budget is running at $100 billion a month. That’s $1.2 trillion a
year, in an economy of some $15-plus trillion – so in terms of deficit/GDP,
that’s about 8%.
Mind you, there has been an improvement in this area.
The fiscal year that just ended (on October 1) saw the federal budget deficit
fall to the said $1.2 trillion, from $1.3 trillion in the previous fiscal year.
But this supposed achievement pales into insignificance when seen in the wider
context: For four successive years the deficit has been well in excess of $1
trillion – a number most people never knew existed, until the crash and crisis
of 2007/2008. Worse still is that every realistic estimate of the deficit in the
coming years, over the rest of this decade, envisages it remaining on this scale
– and those estimates assume that the US economy continues to recover, rather
than slip back into recession.
Even for Uncle Sam, it is very difficult
to finance a deficit of this magnitude – and it might already have proven
impossible without the repeated forays of the Federal Reserve into the markets.
The Fed, via its “QE” programs, has bought very large amounts of government debt
and thereby facilitated the financing of the deficit. To say that the Fed has
monetized the government’s debt would mean that it had violated the law, but in
practice that is what has been happening. Why the result has not been
inflationary is another story, and whether it will eventually prove to be so is
the focus of a major debate within the economic and financial
But unless the Fed really intends to hoover up ever-larger
amounts of US Treasury bonds, it is not going to be possible to continue running
$1 trillion-plus deficits year after year. The investing public, which includes
John Q. Public and the People’s Republic of China, will at some point refuse to
keep buying – or will demand much higher interest rates to persuade them to keep
doing so. In the simple, yet profound, formulation of economist Herb Stein, “If
something cannot go on for ever, it will stop.” The US budget deficit is one of
those many things that cannot go on for ever, and therefore it will
The only relevant question facing the next president and Congress
is whether they will try and stop it in a considered and gradual way, by jointly
formulating a medium- to long-term strategy to reduce the deficit and thereby win
back the confidence of the financial markets. The alternative is that the
markets will impose their will on the American politicians, by refusing to buy
more bonds until their price has fallen considerably and the yield they offer
has risen considerably.
That event would represent a massive financial
crisis, and it would forcibly end the paralysis of the political system and the
total unwillingness of political leaders to address the overriding issue in a
meaningful and nonpartisan way.
Their avoidance of this subject is also
one of those things that cannot go on for ever.