James Anderson writes from Washington: President Barack Obama is back in Washington, having been forced to cut short his holiday in Hawaii to preside over crisis talks about the so-called fiscal cliff that America is in danger of falling off. In a desperate attempt to push for a solution he has met Congressional leaders and then appealed to all members of the US Congress to avoid the crisis that could erupt in a couple of days’ time.
So what does that mean, this fiscal cliff? Tax cuts and government spending amounting to $600 billion signed into law by President George Bush expire on December 31st. If no agreement is reached, taxes go up and government spending goes down. This means that households and businesses will see their spending power decline and government programmes would have to be trimmed. The view here is that this would reverse the gradual recovery of the US economy. So bad news for everyone, you might think. But is it really the case?
Democrats maintain that taxes on the richest 2 per cent of Americans have to increase in order to ensure that existing cuts in taxes for those earning less than $400,000 are retained and the budget deficit is reduced. Republicans know that increased taxes while the economy is fragile could undermine their electoral chances next time round. They campaigned on a no tax hikes ticket and would be seen as betraying the electorate.
Harry Reid for the Democrats has been talking down the possibility of a compromise but yesterday he sounded slightly more optimistic, if only to show that Mr Obama’s intervention has supposedly boosted the chances of reaching a deal. Mitch McConnell for the Republicans also sounded more positive yesterday, promising to do everything in his power to reach a deal. Sixty votes are needed in the Senate to pass new legislation. The Democrats only have 53 seats with two Independents always siding with them. And that is not enough.
America has got itself into an awful financial mess. The Gross Domestic Product is $15 trillion but the national debt is $16.3 trillion and is growing by $3.9 billion a day. Future generations of Americans will have to pay the interest on this debt.
The country has been able to run up this huge debt because the US dollar is the primary international foreign currency. The Federal Reserve, which is not a government body by the way but a private entity, can simply print dollars to pay bills. China has over $1.3 trillion in US Treasury bonds and other paper. If Beijing demanded its money back, the Federal Reserve could print the money and put it on a plane to China. However, that would devalue the dollar and Beijing would receive less in dollar value than it had invested. This situation will remain as long as the dollar is king of the currencies. China is planning gradually to make the yuan convertible. It could then become a strong international currency and end the dominance of the dollar.
Shanghai is proposing to Saudi Arabia that Middle East oil prices be determined there instead of in London (Brent). If the yuan were freely convertible they could be expressed in yuan. The reason why this may happen is that in the next decade the US is expected to be become almost energy independent. It will no longer have to rely on importing Saudi and other Arab oil.
So time is running out for America to put its financial house in order. Some think that President Obama is not bothered if America falls over the financial cliff. After all he is a socialist at heart and thinks that US capitalism is too influential throughout the world. He can also blame the expected downturn in the economy on the Republicans. They, in turn, will blame the recession on the Democrats and argue that they are incompetent in managing the US economy. Another view is that the President thinks the America needs to go over the financial cliff. It will result in a mild recession but will allow the economy to bounce back and the national finances will be healthier. So short term pain will result in long term gain. He hopes.