What they say

Stephen Archer is a speaker with great charisma. By using illustrations and personal experiences and not being afraid to share his own point of view of the current situation and who is to blame for it, he engages the whole audience, at the same time helping us all to understand the credit crunch a little better.

— Warwick Business School


Should the USA follow the UK Economic rescue example?

Traditionally the US economy has been in front of the UK in timing – earlier in and faster out of recession. The global nature of the economy but more particularly the real- time connected financial institutions – from the where this recession has emanated – mean that the UK and US have had remarkably closely aligned recessions.

What maybe surprising is that the US has been worse hit in terms unemployment (9.6% in the US and 7.7% in the UK) and trading deficits.  $360 Billions Q1-3 which is twelve times the size of the £20Billion in the UK Q1-3. For the US the Chinese trading is the most troublesome factor with over 40% of the deficit now being just with China. I will not digress into the Renminbi valuation argument here. For the US this level of trade deficit is to my mind the most serious issue and reason for concern about the speed and sustainability of recovery.

Since 2009 the US debt has risen from 64% to 94% of GDP. This is heading towards Greek and Italian levels. A national debt for the US of over $13trillion is a huge mountain to remove and yet it is forecast to rise to $20 billion by 2015. The US is living beyond its means.

The UK view is that the principle of excessive debt is both financially unsustainable in terms of the cost of servicing debt interest (circa £40Billion p.a. on a debt of £800Billion currently) and that the sovereign balance sheet is in simple terms broke. The credit rating agencies see this as enough of a chink in an economy to potentially downgrade and therefore increase the debt costs even further. They did it to Spain and Portugal this year.

So can the US economy be downgraded by the ratings agencies? It will be a brave move by them things will need to get a lot worse before this happens. There is a sense that the US is ‘too big to fail’. None the less, we have seen the peak of the US as the global superpower. The rivals are now snapping at the US’s heals.

The US economy also faces a risk of deflation to which Ben Bernanke will probably respond by injection money into the system. This may also devalue the dollar making the export recovery more likely.

If we accept that the deficit and debt must be reduced then the two options are tax raises or public spending cuts.  Public spending in the US at 25% of GDP is far lower than the 40% in the UK. So there is less room for manoeuvre. 83% of the US electorate expects state spending cuts.  Cuts have been the main plank of the UK recovery plan and so far they look balanced and are well received by most. Taxes will rise but not to generate anything like the £80bilion savings from spending cuts.

In the US, tax rises would need to be a bigger factor in the deficit reduction programme.

But for the UK and the US there is one focus and action that is still in my mind underplayed – reducing the trade deficit. It’s hurting the UK but really hurting the US. A devalued currency may be tough but in the long run should greatly help the situation – even be the source of the solution. It may even lead to increased inflation, but better some inflation than any deflation.

In the end, the US political system may seriously impede the right decisions being made. The president could do with 5 clear years – not 4 with midterm elections.

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