America Could Still Go Over The Cliff — And Take The Rest Of Us With It

M2RB:  Megadeth

You take a mortal man,
And put him in control
Watch him become a god
Watch peoples heads a'roll
A'roll...

Just like the Pied Piper
Led rats through the streets
We dance like marionettes
Swaying to the Symphony ...
Of Destruction

Questions: America's politicians - especially its weak-willed President - may lack the guts to act to reduce the debt

By Simon Heffer

After America postponed its jump off the fiscal cliff in the small hours of Tuesday night, world stock markets soared. Anyone listening to the BBC yesterday with its headlines praising Barack Obama would think something quite profound had changed in the world’s greatest — if battered — economy. However, it has not.

Intractable problems — chief among them chronic over-spending and weak consumer demand — have still not been solved.

The tackling of those issues has merely been postponed until the end of next month, when America’s legally enforceable ‘debt ceiling’ will probably be reached.

That will be the moment that U.S. debt passes a pre-determined point — north of $16 trillion — and a raft of dramatic public spending cuts will be triggered.

However, America’s politicians — especially its weak-willed President — may lack the guts to act even then to reduce the debt.

On Tuesday, a self-serving and pitiful compromise was reached between Republicans and Democrats to raise taxes by a small amount on the richest Americans — those earning more than £245,000  a year will pay 39.6 per cent rather than 35 per cent.Yet those traders who propelled international markets sharply upwards as a result seem to have forgotten that America’s debt is an incomprehensible $16.3 trillion (£10 trillion) and that its politicians are failing to reduce it.

Instead — in a tactic copied from the EU’s crisis-hit attempts to prop up the euro — there may soon have to be yet another compromise, perhaps with an agreement to increase America’s debt ceiling again. That would damage a limping economy still further.

The rest of the world — dangerously reliant on a buoyant U.S. — should note one thing above all: the fundamentals of America’s economy are, frankly, terrible, and its international dominance is not nearly as assured as it once was. 

Its economic culture has started to change since President Obama entered the White House four years ago this month. 

America more closely resembles Europe in living beyond its means and in the President’s determination to build a massive welfare state.

The danger is that none of his political opponents is powerful enough to force through the decisions that would draw the U.S. back from its economic precipice. They need to find massive spending cuts, and they won’t.

The problem is that the Democrats — who hold the Presidency and control the Senate — bribed their way to victory two months ago.

Economic culture: America closely resembles Europe in living beyond its means and in the President's determination to build a massive welfare state

If Mr Obama had not promised to look after all his client groups, especially among minorities, he would be  back home in Chicago. Now he has to pay out on those promises.

That is pretty much the way New Labour operated in Britain, by creating a vast state sector funded by the public purse that would, in return, vote for Tony Blair and later Gordon Brown.

The long-term legacy of that self-serving policy can be seen today in our disastrous national debt. 

The problem for America is that its per capita debt is worse even than ours.

It may be a land of opportunity with a strong work ethic (though 12 million people are unemployed and 8.2 million work part-time), but it is living seriously beyond its means.

If the debt ceiling is reached, and it is only just above that current £10 trillion debt, then automatic cuts will be enforced across the board of government budgets — which would have a knock-on effect for the rest of the world.

Self-serving: The long-term legacy of New Labour's vast state sector can be seen today in our disastrous national debt

Britain is the biggest overseas investor in America. So when U.S. growth is feeble, we suffer because there is a falling off in demand for our exports.

While the markets rocketed yesterday, they may soon be going in the other direction if a more robust and permanent solution to this American crisis cannot be brokered.

The bigger picture, of course, is that in the past decade the U.S. has stumbled from one financial setback to another.

The American people, and, indeed, the rest of the world, urgently need to revise their view of how economically strong this ailing superpower really is.

For those who have grown up assuming that America will inevitably lead the world economically, that will come as a shock. 

Personally, I believe the U.S. is at a similar point in its history to the one Britain reached in the 1890s, when Germany overtook it: the once dominant world power is entering a period of long and steady decline, as more efficient nations seek to seize pole position. 

One thing holding back American growth is its massive trade deficit, notably with China and other Asian economies. 

Growth at home is essential to create the wealth to reduce debt and the annual budget deficit, which is around $1 trillion (£614 billion) a year.

The fundamental problem  is that President Obama’s ballooning public sector, and the higher taxes already inflicted on small businesses, are forecast to inhibit the  private sector job creation America so desperately needs to grow more quickly.

Higher business taxes cut money for investment, which stops the innovation that might improve U.S. productivity and therefore help its competitiveness.

Without growth, the debt will never decline as a proportion of America’s gross domestic product.

A series of bad decisions in recent times have hobbled America. The first was  when Bill Clinton asked Alan Greenspan — then running the  Federal Reserve Bank — to make it easier for Americans to buy their own homes.

The result was the sub-prime mortgage disaster, in which loans were made to people  with little hope of repaying them, for properties whose  values collapsed.

The bursting of the dotcom bubble — the collapse in the value of internet stocks — in 2001 also destroyed much American wealth.

However, President George W. Bush depended on the traditional resilience of his country’s economy to make good the damage.

It almost did, but fighting wars in Afghanistan and Iraq made huge inroads into economic reserves and into tax revenues.

That plunge in tax receipts became worse after the collapse of Lehman Brothers in autumn 2008, which triggered a widespread economic crisis and a full-blown recession. And just as unemployment benefits started to drain the economy, the number of pensioners rose as the baby-boom generation, born after World War II, began to reach retirement.

Public debt is the equivalent of £32,000 for each of the U.S.’s 320 million or so inhabitants — or over 100 per cent of GDP. It’s a terrifying figure.

When Mitt Romney ran for office last year and promised to implement the tough fiscal plan of his vice-presidential running mate, Paul Ryan, to cut the deficit and the debt, the U.S. electorate rejected him.

If they thought they could avoid a political confrontation about spending and taxes, however, they were wrong.

That is likely to come within six or eight weeks. Meanwhile, the uncertainty about how — indeed if — America is going to put its financial house in order will continue to destabilise its economy and deter investors.

Optimists say the country will pull itself up by its bootstraps, as it has before.

Certainly the advent of ‘fracking’ — extracting oil and gas cheaply from shale — must not be underestimated.

America should have cheaper energy within a few years, which will lower the costs of industrial production and distribution. But banking on that alone to rescue an economic superpower is a risky business.

What America is doing is the equivalent of putting a bill behind the clock on the mantelpiece and hoping that it will go away.

But it won’t, it will only get bigger — and if it isn’t paid, the effects will be felt far beyond American shores.

Symphony Of Destruction - Megadeth

You take a mortal man,
And put him in control
Watch him become a god
Watch peoples heads a'roll
A'roll...

Just like the Pied Piper
Led rats through the streets
We dance like marionettes
Swaying to the Symphony ...
Of Destruction

Acting like a robot
Its metal brain corrodes
You try to take its pulse
Before the head explodes
Explodes...

The earth starts to rumble
World powers fall
A'warring for the heavens
A peaceful man stands tall
Tall...