We have seen the fallout from the debt crisis in Dubai and Greece. But are these events a harbinger of what could happen in the United States and Japan?
Dr Doom, economist Nouriel Roubini warns there is a big risk that this will happen, particularly if the Democrats lose in the mid-term elections this November and after Massachusetts, that's looking likely. If that happens, there will be no tax rises and spending cuts will be put on hold. The only other solution is the last resort of desperate governments everywhere: use the printing presses to produce more currency. And that spells disaster.
Roubini writes: "The US is a net debtor with an aging population, unfunded entitlement spending on social security and health care, an anemic economic recovery, and risks of continued monetization of the fiscal deficit. Japan is aging even faster, and economic stagnation is reducing domestic savings, while the public debt is approaching 200% of GDP … If America's Democrats lose in the mid-term elections this November, there is a risk of persistent fiscal deficits as Republicans veto tax increases while Democrats veto spending cuts. Monetizing the fiscal deficits would then become the path of least resistance: running the printing presses is much easier than politically painful deficit reduction. But if the US does use the inflation tax as a way to reduce the real value of its public debt, the risk of a disorderly collapse of the US dollar would rise significantly. America's foreign creditors would not accept a sharp reduction in their dollar assets' real value that debasement of the dollar via inflation and devaluation would entail. A disorderly rush to the exit could lead to a dollar collapse, a spike in long-term interest rates, and a severe double dip recession."
What is needed now is tough action to rein in debt and create employment to restore the tax base. The question is how long that would take and whether there will be enough time to do it.
no comment untill now