On Tuesday, the United States Senate passed the budget deal, averting what could have been, the first debt default in its history. The debt bill has now become a law, with the Senate voting 74-26 in favour of raising the nation's debt ceiling by almost 2.5 trillion dollars. This is the largest increase in the debt ceiling ever. Indecision on increasing the limit by 2nd August would have created an apocalyptic scenario for the financial markets, and therefore the signing of the deal by President Obama was largely anticipated.
Although the successful signing of the deal has lead to widespread relief in the country, the looming question of how the close to 15 trillion dollars in accumulated debt is ever going to be repaid still remains unanswered. The accumulated debt now adds up to approximately 50,000 dollars per person - and the markets have not failed to take notice of the unsustainable trajectory that the economy has been propelled into. The S&P 500 index plunged over the last two days, recording negative gains for the year on Tuesday. The plunge of over 100 points from the year highs is indicative of the shift in market sentiment.
Until a week back, it was uncertain whether the financial markets were in fact in a slow summer phase - much like last year, where gains were hard to come by. Many market bulls dismissed the whole double dip debate pointing towards the strong performance by equities, especially blue chip stocks. However, with the major indices turning their backs on these eternal optimists over the last few days, exacerbated by the flimsy nature of the debt deal, few would have the courage to call the anaemic 1.3% growth rate in the second quarter signs of a recovery. This is ironic given that at the beginning of the year, the situation was assessed to be complete opposite - few would dare to call a bear market in 2011!
The total agreed upon cuts in discretionary spending add up to around 917 billion dollars over the next 10 years. This is unequivocally seen to be a token amount, considering that the country is going to spend 817 billion dollars in discretionary spending over the same period of time. Continuing along this trajectory, social security programmes will be bankrupt by 2036. If interest rates go up, that day is not far, when the United States Government will have to pay a trillion dollars a year, just to repay its debt obligations. This will exceed entitlement payments, as well as defence spending.
Over the past year, Obama has been constantly emphasising that economic growth is America's ticket out of the current gloom, and justifying discretionary spending to create momentum. Having spent the allocated money for the second round of quantitative easing, it is not clear what the drivers of this envisioned growth are going to be (a third round of easing perhaps?). Manufacturing data released on Monday indicated that the economy is slowing considerably, with numbers being lowest since mid 2009 levels. The job market is not picking up pace either, and with marked slowdowns in consumer spending, it is not clear either, where the consumption demand is going to be generated from.
Although the Republicans technically control one half of one third of the government, they have leveraged their bargaining positions due to the ongoing faltering recovery and the constant dithering amongst the Democrats. Obama cannot possibly expect to leave any mark he can call his own, in the rest of his days as President. He has already expressed that he feels like he has been "left at the altar", and it is certain that his decision making going forward, is going to be conservative and bipartisan, that is - not his own. However, it should be conceded that the pendulum swings in his position on the economy are hardly his own fault - this is a complicated situation that even his team of economic advisors have not been able to crack.
Obama's top economic advisor, Austan Goolsbee, resigned in June this year to go back to his teaching post at University of Chicago. It is debatable whether his decision was spurred by the university's handbook of rules, which state that leaves of absences should not exceed one year, or whether he decided to abandon a sinking ship at the opportune time - before the situation got palpably worse. What is clear is that nobody in Washington is ready to own up to the debt, and at a time when the country most requires a real sustainable economic game plan, there is none.
(Vivan Sharan is an Associate Fellow at Observer Research Foundation)
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
PREV
