US Real Politik - Boomerang Part I

Politics and adapting to the new normal, it seems a bridge too far for many amongst us. And it's not restricted to Europe with its more than fair share of anglo-saxon media attention and frequent abuse. Pretty soon, it's back to Uncle Sam.

During the silly season of 2011, we have witnessed a tough battle between bi-partizan Washington, more than ever divided between donkeys and elephants. At the start of August, a last minute deal was struck to lift the debt ceiling towards 15,194 billion USD. Meanwhile, the clock has been ticking ruthlessly and mid last week, almost unnoticed, the US passed the 15,000 bio USD debt barrier or roughly 100% of GDP. And Uncle Sam is in even more serious trouble because his current deficit is estimated at roughly 10% of GDP, worse than Japan, the UK and more than double the number of the Euro-zone. But the printing press and healthy FED appetite has saved the day for the US Treasury, so far so good. The facts and as a reminder a repetition of a chart from a couple of blogs ago :

On the agenda : roughly 1,2 trillion USD or 1,200 bio USD of structural savings (nearly 900 bio EUR). And a quick view on the budget outlays and revenue side gives you an impression on the choices to make and on the promises made. Economics = choice, a penny spent here is not a penny elsewhere. And when you thought in Belgium it would be a tough ideological battle, the US has certainly a tough new game of arm wrestling lying ahead. For instance, taboos for the Republicans made very clear are the abolishing of the tax relief for the 1% wealthiest as are spending cuts in the military. In fact, some Republican representatives of California have already announced legislation to prevent spending reduction in defense. Other sensitive points are the extension of consumer tax reliefs and payroll tax cuts.

S&P reaffirmed nevertheless its AA+ rating for the US. Radio silence from Moody's but Fitch has also warned that a failure of the congressional supercommittee would trigger negative rating action (outlook revision - effective downgrades). And it seems we're very close to that point. In fact, a majority of political observers no longer expects a fundamental change in the budget in the coming months so close to the election 1 year from now. And that's not good because in good old tradition, an incumbent President needs to score on the domestic front (remember "it's the economy, stupid"). But there are other options left of which more in Part II.