Sunday, December 11, 2011

Austerity waits in the wings as America delays the debt crunch

2011 began with Congress digesting a report called The Moment of Truth. Commissioned by President Barack Obama and co-authored by two experienced Washington hands, its 66 pages pulled few punches.

America's debt was the greatest threat to the country's national security, it argued, before laying out a comprehensive plan to cut it. As the year draws to an end, and the report gathers dust, it is hard to escape the irony that the Pentagon is now facing a $500m (£319m) cut to its own budget from the start of 2013. That the Defence Department is in the line of fire sums up a year of failure by politicians to confront a national debt that quietly passed the $15 trillion mark last month. It's been a two-part failure and is worth briefly recapping.

In early August, Congress just avoided default by raising the country's $14.3 trillion debt ceiling. As part of that deal, $900m in cuts were agreed on and a committee established to find another $1.2 trillion of savings by the end of November. Failure to do so would trigger automatic cuts in government spending, including the Pentagon. A day before the Thanksgiving holiday, the committee's 12 members admitted they couldn't agree.

Bond investors haven't blinked at the lack of progress this year. The yield on the 10-year US government bond has hovered close to a record low for the past six months. Many on this side of the Atlantic know that the explanation for the bond market's leniency lies in Europe.

Unsure whether the euro will survive, global investors have poured money into the US Treasury market. Analysts at Bank of America estimate that the yield on the 10-year bond would be half a percentage point higher without Europe's woes.

But with 2012 coming into view, there's an uneasy recognition in Washington and on Wall Street that America's reckoning on the deficit is moving closer. "We've seen a lot of European countries take a bath this year," said Bill Frenzel, the former top Republican on the House of Representatives Budget Committee. "For a country that can't pay our bills, it's miraculous that our interest rates haven't gone up. It can't last," he says.
Read the rest here.

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