August 1, 2011

Short-term solutions for a life-long problem

Just like a big playoff game, a forced shot in the last seconds has made it possible for the US Government to reach an agreement on raising the debt ceiling, see Reuters coverage. It has been, as basketball fans would call it, a buzzer beater.
However in this case, there is no real reason to high-five your teammates or to have even the smallest grin on your face. Because this is not a win, this has only been a disaster-avoiding move. Maybe the markets will see it differently during the first hours and recover some of the ground lost last week (gold is already down a little), but the situation is still critical, and the rating agencies' threat to slash USA's AAA rating is still there.

The last minute deal that has helped avoid the possibility of the US defaulting on its debt includes a 2.4$ trillion spending cuts package to be applied for the next ten years (no extra details are known yet about how and where they will be placed). However these cuts will not be introduced until at least 2013. The reason behind that? Sadly a partisan one, as 2012 is election year and neither Democrats nor Republicans want their chances of winning the presidential race altered because of something as ugly for voters as these spending cuts. Of course spending cuts are never popular or welcomed decisions, it is far easier to "buy" a vote by promising new social measures or tax reductions than by being responsible with your country's finances... but these cuts are sure needed and someone has to do them. Once again short-sighted and selfish political interests take the upper hand and put everyday's problems and the future of the economy to the background.

I must say something to justify Democrats and Republicans decision to delay the cuts until 2013 though, the US economic recovery is being quite weak and slow as of today, so applying extra spending cuts now could definitely stall said recovery. And the last thing the US needs now is an economic contraction, as it would be devastating, specially regarding unemployment. But once we have reached this point we can say that this is (once again) delaying the problem, not solving it. 

We are in a situation where people should already notice that a great part of the economic growth of the pre-2008 years was debt-based rather than real growth. Financial irresponsibility has been the most common behavior regarding government spending and debt issuing, not only in the US but elsewhere. Now the time to pay the bills has come, but nobody seems to be up for the challenge.

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