FISCAL MESS IN US

this was written back in 2011.Just read it one of the saved file.
US has done well and stands the best among the developed economies while the European economies are struggling  as even the German Engine is showing some signing of recession.

Back then my views when the ratings changed for the US

‘US sneezes and  its  effect is felt all over the world ‘was  witnessed during the world financial crisis in 2008. While India and most other countries are recovering with a scintilla of optimism in US as well, the efforts were dwarfed by the recent debt ceiling by the Congress to avoid a possible default. The ramification  was that US’s credit rating was downgraded the following day by S&P from AAA to AA+ for the first time ever.

    What was the reason for the almost default? America was not able to pay for its high military salaries , medical insurance,social security benefits and unemployment insurances, thus it had to chose the path of extending the debt ceiling,otherwise ‘the impending default’ would have embarrassed the US on the global front. The Wall Street plummeted the following day showing that markets reacted negatively to the surmounting debt. What does  this actually means?  US raises its debt ceiling, which  will be financed  by issuing treasury bills and monetization of fiscal deficit. As the US credit rating is downgraded means that US credit worthiness is low making US bonds riskier. The risk has to be compensated by paying high interest on the bonds as skittish investors try to move to other markets. The interest rate didn’t observe a sharp increase as there aren't many substitute bond markets against the US . China which holds 46% of the US debt can exert pressure on US on policy making as it can withdraw debt leading to high interest rates which in turn would lead to high borrowing costs discouraging private investment and consumption in US.

   The US is in a very precarious position right now, Obama Administration is not able go ahead with abolishment of ‘bust tax cuts’ because the Republicans won’t approve it. Government spending has also been reduced but only to a small extent and it is expected that fiscal deficit will continue to hover around 9% of the GDP. Employment is still as high as 9 % in the US. Also  the retrenchment of government spending  can endanger economy by hindering the Neo Keynesian policies that are required in a ‘depressed economy. Whatever the US is required to follow in this situation will not be approved by the Republicans. They are in not in favor of slashing tax breaks granted to the rich. While this is the time that for the  ultra rich to part with their wealth to ameliorate the economy from this depression, we cannot expect much from them.

So while the US is still not back on its path to recovery with the third quarter experiencing a 1% growth ,India’s growth rate has also remained at 8.2% for the third quarter. The target of 9% growth seems ambitious but not impossible for Indian economy , but with global uncertainties and a volatile  market may inhibit growth by reducing export demands and  FDI.The US would be able to recover only if  Obama Administration is finally able to go ahead with its objectives of fiscal consolidation with appropriate government spending for creation of jobs provided the Republicans would not preclude his efforts.