U.S. debt situation defines dysfunctional government

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The Gazette, Wednesday, August 3, 2011

Well, of course U.S. President Barack Obama and the Democrats on one side, and House speaker John Boehner and the Republicans on the other, came to an 11th-hour deal on the American deficit and debt crisis.

Obama agreed to cut spending by $2.1 trillion over the next 10 years, in return for Congress raising the federal debt ceiling by a similar amount over the next two years.

Obama and Boehner, along with senior leaders of both parties, reached a deal on Sunday. It passed the Republican-dominated House of Representatives on Monday, and cleared the Democratcontrolled Senate on Tuesday.

You don't see that every day. But then, it was no coincidence that Aug. 2 was the U.S. government's own imposed deadline for raising the debt ceiling. After that, the U.S. Treasury announced months ago, it would simply run out of money to pay its bills.

The consequences of failing to do so were unthinkable.

First, credit-rating agencies had already let it be known that they would downgrade the credit rating of the United States from gilt-edged AAA to AA, automatically raising the cost of issuing government treasuries.

This would only have aggravated the U.S. deficit and debt situation.

(Canada had its AAA rating renewed last month, reflecting a strong economy and a solid federal fiscal framework.)

Second, with no spending authority to pay its bills, the U.S. faced a potential default on its debts. The "good faith and credit worthiness" of the United States would have been in question.

Third, a run on the U.S. dollar was a real possibility. And that could have put the greenback's status as the world's reserve currency in question. One reason the loonie has been trading around $1.06 U.S. is that our dollar is a petro currency and oil is back to the $100-per-barrel range.

Another is a flight to safe havens like the Canadian dollar.

Fourth, even the possibility of any of the above could be enough to trigger another stock-market meltdown and global financial crisis.

Just last week, the Dow had five consecutive losing sessions on the prospect of no deal in D.C., losing four per cent on the week.

In an extremely volatile session on Monday, the Dow opened up nearly 150 points on the good news of a deal, only to plunge 250 points by the lunch hour, before rallying to close down only 11 points. Elsewhere, global markets were awash in red on Monday, and opened down sharply in Asia on Tuesday.

Deal or no deal, there's no shortage of challenges and uncertainty.

The U.S. unemployment rate remains close to recession levels, at 9.2 per cent in June, nearly two points above Canada's at 7.4 per cent. Ontario alone boasts of creating more jobs in June than did the entire United States.

The U.S. youth-unemployment rate, at 18 per cent, isn't just an economic issue, it's a social problem. Manufacturing jobs are going unfilled because of a shortage of qualified technical-school graduates.

The U.S. housing market has lost about 30 per cent of its value since 2007.

At a moment when the U.S. economy could do with some additional stimulus, it's no longer available to Obama. Part of his deal with the Republicans is no new taxes, so that's out. And even while he gets to raise the debt ceiling by $2.1 trillion over two years, which gets him past the 2012 presidential election cycle without another such unedifying spectacle, he's agreed to cut spending by about the same amount over the next decade.

It sounds like a lot of money, but in terms of the U.S. deficit and debt, it's just a down payment on the deficit. The U.S. deficit of $1.6 trillion in the last fiscal year was 10 per cent of GDP. And this, in a country whose debt is now a shocking $14.3 trillion, up from $6 trillion when Bill Clinton left office in 2001. Think of more than doubling your household debt in the last 10 years.

The structural deficit problems of the U.S. can be stated in these simple terms: Washington spends more than $3 for every $2 it raises.

Part of the reason for that is systemic gridlock in Washington. There isn't really much accountability in a system that enables the president and Congress to blame one another for nothing getting done.

U.S. voters knew they were electing a divided government last fall when they gave Republicans, with the Tea Party insurgency, control of the House of Representatives.

But if they thought their government was dysfunctional then, look at it now.

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