As I see it, the current US&World financial crisis was a result of greed. If we dig deeper we can also say that it was due to improper valuation of risk. Now that US economy is in a big hole what's the solution - borrow some more? I am not sure if anyone else sees the problem as one of living beyond the means requiring to curtail expenditure and increase savings rather than borrowing some more.
The current US federal debt is around $10.6 trillion-1. With the proposed second bailout this might well inflate to $12 trillion by the end of year. Every penny US borrows it has to pay interest on. As of now US and Federal reserve has the luxury of keeping interest rates low while still having people interested in funding US debt. This keep the interest payments down to very low. Since the world considers US dollar as a reserve currency, in the time of crisis such as this, they are happy to transfer their assets to US dollar. Hence US dollar is also very strong at the moment. However, things are bound to change sooner or later.
Emerging economies are posting relatively strong growth and sooner or later people will start to look for alternative investments that they do not consider to be much riskier. It would then be harder for US to raise money at very low interest rates, they might have to raise them a notch. The interest payments will at the same time start to balloon. Of course US has nothing to worry about as it can print more money as and when it wishes. However, the inflationary effect of such an action might result in US dollar falling sharply. This in turn would require Fed to raise interest rates to prop up US dollar.
In past several countries have faced these economic and financial crises and as far as I can tell IMF always advocates tightening on spending. I understand why spending is required to stimulate the economy but feel that we must consider the additional risk that comes along with it. So the question is whether government should in turn be advising citizens to save, live within the means and forgo certain pleasures at present to ensure a safe and secure future. Or is the American lifestyle uncompromisable at all cost. Is US willing to take a risk of deeper collapse to ensure a quicker recover? Appears we have not learnt anything from the current debacle.
2 Comments:
Such a right thought there... It is quite an intriguing as well as a frustrating situation and brings one back to the same place where it all started making one feel like he/she has not learnt anything.
I am not sure how long will it take to realise if we are on the right path or the wrong one. I suppose only time will tell...
Loved your reasoning Anand. I totally agree that the need of the hour is to reprogram our mindsets and limit our otherwise crazy spending spree. While everyone around seems to be talking way too much on the current unpleasant conditions - numerous layoffs, Bearish run of the Stock Markets and related pessimism, I strongly feel that as individuals we should utilize this time in honing our skills and preparing ourselves well for the future.
Keep posting such thought provoking posts - Cheers !
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