pri Cheap Money Debt Cheap Money Debt

Few Days back the federal head declared that interest rates will remain zero for a longer time and there are least chances of any hike in the coming few quarters. Speculators and world stock market jumped and rejoiced this declaration as good as ‘Celebration of Christmas’.

Cheap money supply will remain for some more time giving more opportunity to invest in emerging market and increase the assets prices. But among all these we forgot to accentuate that US fiscal deficit is rising which is not a burden for US economy but will be shared equally among other economies. Now a thought line will emerge among my readers that how that happens to affect.

If we look at the past journey of the US fiscal position we find that:US Debt to GDP 1

  • In the last year of the Bill Clinton Presidency, America reported a fiscal surplus of $236 billion.
  • Trade deficit in 2000 was already a high $380 billion.
  • In the year 2008, it became miracle by transforming the $236 billion surplus to a deficit of $410 billion.
  • By 2007, it had ballooned to $700 billion.

A real miracle happened in the fiscal deficit. Moreover we also find the US consumers were running the life on the wheels of borrowed money. American households splurged $110 billion of borrowed money where most of the debt coming through the sub-prime route.

The below chart shows the rising US debt.

US Debt to GDP 2

Consumer house holding was next to negligible. If we make a quick look at the US consumer savings we find:

  • In 1950, when the Post-War boom began, savings as a percentage of disposable income in American households was a respectable 8% or so.
  • The savings percentage rose to almost 12% by 1980.
  • By 2004 savings rate had plunged to 0%.
  • By 2007, it was nearing -2%.

Savings were not in the dictionary of the US consumers. This also resulted to high borrowings and finally the Sub prime crisis won the match.

What we find in the future is that US will face hard times to generate revenue for itself.

  • At present US will have a $1.75 trillion deficit this year. The figure represents 12.3% of estimated gross domestic product, double the previous post-war record of 6% in 1983, and the highest level since the deficit totaled 21.5 percent of GDP in 1945, at the end of World War II.
  • The stimulus along with Zero interest rates will spook higher the fiscal deficit. We are enjoy the Cheap Money at the cost of the GDP.
  • The fed might be able to bring smile on the faces of investors for the time being but will not last much. It might have to go much faster to hike its interest rates. Since as long the interest rates remain zero the fiscal deficit will climb to 15% of GDP in the year 2010.
  • In order to reduce the fiscal deficit the US government has to impose taxes on corporate and individuals. This might not be prune decision keeping the weak business confidence.
  • Total government debt will move well above the G20 average. In a few years the AAA rating of Treasury bonds of US could be in jeopardy.
  • When unemployment is hanging around 10.2% then imposing taxes on corporate along with individuals will be not being advantageous for US economy.
  • Even if the US plans to cut on spending that will result to no new job creation which will bring higher numbers of unemployment.
  • Hence taxation is not the way of capping the rising fiscal deficit. At the same time savings of households are running at negative zone in the current phase along with a rising unemployment of above 10.2%.

So speculators and world stock markets are playing their game but not for a longer time and will have to face something more than a night mare.

The real journey of the world stock market begins once the interest rates get rising. As US fed is behaving in a cool way  to the world economy but in real terms its is sitting on a active volcano of rising debts followed, with no corporate growth with less investments in capital extensive sectors.

Spending of stimulus and zero interest rates are happening but not much for the desired purpose.

Every one is busy in making money at the cost of cheap money.

Authored by: Indranil Sen Gupta, Research Analyst

Author Bio

Qualification: MBA
Company: IFAN Finserv Private Ltd.(SPA Group Company)
Location: mumbai, Maharashtra, IN
Member Since: 25 Sep 2019 | Total Posts: 130
God has been kind and the people with whom I have the journey of my career over the last 16 years have been great fortune to have them as my best friends standing today .Well, I hold more than 16 years of experience in the Financial Advisory, Global Macro Analysis and Business Development Strategy. View Full Profile

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July 2021