As U.S. doubles down on debt, EU austerity is paying dividends

As U.S. doubles down on debt, EU austerity pays dividends

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Op-Ed: While other economies are on a strict debt-diet, the U.S. is gluttonous and hungry for more. Trumponomics has undoubtedly made the national stock markets happy, but a new financial crisis beckons, at least if the recent International Money Fund (IMF) forecast is to be believed.

Does no one in the U.S. remember the debt crisis? In its wake, the 2008 financial crisis caused country after country, particularly in the U.S.-linked Eurozone economies, to falter in light of their rising debt-to-GDP ratio.

The combination of decades of economic stagnation along with swelling debt was a recipe for permanent reversals, read the IMF warnings at the time.  The warnings were not limited to the relatively weak economies of countries around the Mediterranean either; France and Belgium certainly felt the backdraft of the neighbouring burning economies as well.

For almost a decade, since 2008, the European economies have slowly recovered, and are now showing surprisingly strong growth, thanks to the efforts of the Frankfurt-based European Central Bank (ECB). On April 23rd, the central European Monetary Union (EMU) accounted for its members 2017 debt-indexes, closely followed by the IMF releasing its prognosis for the coming years. The development looks better than ever.

However, that is Europe. Since the latest financial crisis, the continent has tried to separate its geo-economic strategy from its American brother and clean up its debts. Even laggards like France have begun to get their notorious deficits into good order, which, in comparison, leaves the IMF prognosis for the U.S. looking all the bleaker.

The U.S. stands out as the world’s only mature economy projected to have a rising public debt relative to GDP over the next five years, according to the IMF. And, despite this forewarning, there are few signs of the trend changing. President Donald Trump’s substantial tax cuts and spending increases tear new holes in the American government’s finances, based on the White House’s faith that it will yield extraordinary growth in the long term.

U.S. public debt held by the public from 2000 to 2017, with an additional forecast from 2018 to 2028. (Graph made in Tableau, by Statista)

With 2018 being the first year that Trumponomics comes into its full swing, the estimate for the U.S. budget deficit is already set to rise to over four percent. The Congressional Budget Office (CBO), a bipartisan U.S. Congressional authority, expects the average for the 2021-2028 period to be placed at just short of five percent.  Deficit numbers of this magnitude have not been seen since World War II, except for the catastrophic 2007-2009 financial crisis years. Moreover, for each deficit year, the U.S. national debt climbs ever higher.

Chart of U.S. Treasury issuances of long term bonds (largely 3, 10, and 30 year notes). (Bloomberg Graph)

With a legacy of better budgetary discipline, the upper western European nations — Germany and Sweden, for example — stand in stark contrast to the U.S.

Sweden is showing a surplus of over one percent for 2017 and is expected to hit two percent by 2021. The German economy has, despite carrying an immense burden by supporting the flailing economies of Spain, Portugal and Greece during the financial crisis, recovered to the point where it mirrors the Swedish one. The economies of Denmark, Norway, Austria, and the Netherlands have also improved to the point where they can even afford a degree of fiscal expansion.

All these European nations have one thing in common: they have continued seeking to slice down their government debt-to-GDP ratio. That’s something that goes against the very essence of Trumponomics. 

President Trump with Jerome Powell, the new head of the U.S. Federal Reserve, formerly a lawyer for the Carlyle Group. He made his debut in Washington as lobbyist for the  Bipartisan Policy Center in 2011, pushing congress to raise the debt ceiling. (Getty Images)

Barely a year into his first year in office, it is as if all the scandals and investigations against the president (not to mention trade drama) was not enough. The latter part of Donald Trump’s presidential term is furthermore at risk of being weighed down by recurring concerns over U.S. government finances and credit, as well as the dollar’s position as the global reserve currency. It appears that with the current U.S. approach to its geo-economical stature, the U.S. economy might soon find it difficult, despite its protectionist approach to domestic markets, to compete in fast-changing world markets.

[Title image by James Fox]

John SjoholmLIMA CHARLIE NEWS

John Sjoholm is Lima Charlie’s Middle East Bureau Chief and founder of the consulting organization Erudite Group. He is a seasoned Middle East connoisseur, with a past in the Swedish Army’s Special Forces branch and the Security Contracting industry. He studied religion and languages in Sana’a, Yemen, and Cairo, Egypt. He lived and operated extensively in the Middle East between 2005-2012 as part of regional stabilizing projects, and currently resides in Jordan. Follow John on Twitter @JohnSjoholmLC

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