Japan, now the third largest economy in the world (China has recently assumed the spot of number two) is continuing to accrue worrying economic metrics. For the first time in nearly two years, export-dependent Japan incurred a trade deficit. According to Tokyo, the nation incurred a $5.7 billion negative trade balance in January. The trade figures, however, were not the only troubling development on Japan’s economic front.
Moody’s has just lowered Japan’s debt rating from stable to negative. This comes in the wake of Standard & Poor’s downgrading Japanese public debt from AA to AA-. Japan has the developed world’s highest ratio of public debt to GDP, a figure approaching 200 percent. These recent developments portend the growing risk of a sovereign debt crisis confronting Tokyo. A growing number of investment fund managers are warning that the current trajectory of Japan’s public debt and annual government deficits is unsustainable. Could Japan become the Greece and Ireland of the Far East? These negative metrics, in conjunction with Japan’s aging and declining population, point to a deepening economic and fiscal crisis for the land of the rising sun.
As the United States national debt reaches parity with total annual GDP, President Barack Obama continues to preside over a record level of deficit spending by the federal government. He has just sent to Congress a proposed $3.73 trillion budget for FY 2012, while forecasting a record $1.65 trillion deficit for the current fiscal year. Earlier, the Congressional Budget Office projected that the current deficit would reach at least $1.5 trillion. These figures mean that America remains trapped with unsustainable structural mega-deficits, and that more than 40 percent of everything the U.S. federal government spends is financed with borrowed money.
As I have commented on before, this level of government indebtedness just cannot be sustained, and will lead to catastrophic repercussions. While the politicians in Washington, particularly in the Obama administration, pay lip service to the need to “rein in” this profligate public spending, nobody believes that they are serious. The president’s claim that he “plans” to reduce the deficit cumulatively over ten years by just over a trillion dollars is an utter farce, since even by the most optimistic forecasts this would leave a combined deficit over the decade of more than ten trillion dollars.
The problem, however, is not uniquely one of the Obama administration and the Democratic Party. The Republicans, who left for Obama as an inaugural present in 2009 a first-ever annual deficit to exceed a trillion dollars, are as intellectually bankrupt as are their adversaries on the other side of the aisle. The GOP is equally bereft of ideas on how to control this raging fiscal train wreck, offering little more than worn-out cliches such as reducing taxes, as though that would not further exacerbate the federal government’s structural mega-deficit.
What we are witnessing is not only an economic and fiscal calamity in the making. It is as much a display of political dysfunctionality and moral cowardice as it is of inept fiscal policy. Which leads to the melancholy conclusion that it will not be the political echelon in Washington that ultimately imposes budgetary discipline on public spending. Increasingly likely is a doomsday scenario, in which the bond vigilantes, well practiced already with their punishing assaults on the credit ratings of Greece, Ireland and now Portugal, unleash the full fury of the market place on Uncle Sam. When that fiscally apocalyptic moment arrives, not even the impressive weight of political inertia that resides in Washington DC will be able to impede a sovereign debt crisis in the United States that will not only cripple the nation’s economy with devastating effect; it will likely dispossess the next generation of Americans of their future.
In a recent interview with Bloomberg TV, Dr. Nouriel Roubini, one of the foremost economists monitoring the global financial and economic crisis, warns of grave dangers facing the public budgetary imbalance of the United States. “The fiscal problem is very serious. The bond vigilantes have not yet woken up in the U.S. in the way they have in the Eurozone. Unless the U.S. addresses this fiscal problem, we’re going to see a train wreck.”
Roubini in the past has supported the vast budget deficits of governments and monetary loosening of central banks as a painful but necessary measure by advanced economies to redress the damage resulting form the financial and economic collapse of 2008. Even then, he warned that there was no free lunch, and that policymakers would have to present a credible plan for withdrawing stimulus and monetary easing and curtailing their levels of public debt. Now, with a full-fledged sovereign debt crisis raging in Europe and the U.S. trapped with a structural mega-deficit, Roubini and other perceptive economists are clearly worried about the unsustainable budgetary imbalance of the U.S. federal government. Indeed, a day of reckoning is coming closer, with no cogent remedies on the horizon. It is becoming far more likely that a fiscal train wreck is a future destination for the U.S. economy, and that future may not be long delayed.
According to the non-partisan Congressional Budget Office, the annual deficit of the United States federal government will reach $1.5 trillion in 2011, a record amount in nominal terms. More alarmingly, the CBO projection exceeds 10 percent of the U.S. GDP for the first time since the onset of the global financial and economic crisis in 2008.
Two things need to be pointed out. The CBO forecast is not a “worst case” scenario but a conservative projection, which may possibly be exceeded. Secondly, this staggering structural mega-deficit follows on the heels of several previous annual U.S. trillion dollar annual deficits, in parallel with similar ratios of government deficit to GDP in many other advanced economies.
The continuing flood of red ink is rapidly hastening a “come to Jesus” moment for many indebted economies, and a catastrophic sovereign debt crisis looks increasingly likely for the United States.