Wednesday, August 4, 2010

380 Billion Dollar vs. 13000 Billion Dollar

If 380 billion dollar debt burden could smash Greece's economy into pieces, then will the United States -with 13 trillion dollar debt under its belt- share the same fate in the future?

Barack Obama could not sleep tight these days. The words of one of his economic advisers echo in his mind as he puts his head on his spongy pillow at night, “Alarming news, Mr. President: unemployment rate still relatively high, the threat of deflation still persists, and our economic recovery in overall is limping slowly in the path where China is running riot.”

That economic adviser pauses a while and finish his round of words with a massive blow, “I know that you have spent lots of money these days –but we really need to spend more.”

Spend more? Add more debts? Deep inside Obama’s heart he is surely yearning for the end of massive spending. He knows it, the Americans know it: it’s too much budget deficit already these days and the US debt has gone to a lethal number.

What a doom that Obama inherits. Bill Clinton may have long-sufferingly amassed the money in the mid 1990s, but two Texas cowboys with 'Bush' pedigree splurged it wildly –so wild that if there is anything left for Obama, the massive debt from Bush’s previous fondness of wars is all he’s got.

In Greece, the consequence of piling up debt proved to be fatal. And if even mercurial Gods in Olympus were unable to thwart the crisis; then should anyone remind the mortal Obama that this could be the right moment to stop spending and cut the budget deficit?

No, he should not and will not stop spending. During these hard times, flatlined economy like US need government spending more than anything else to galvanize the economy until it is completely back on the right track –even if that means lots of money poured in to the market with 13 trillion debt daunting behind as the consequences.

Hence if you are embroiled in a financial crisis where the threat of recession or depression is imminent, spending money or running a budget deficit policy is absolute necessity.

After all, maybe one should stop calling US as a liberal and lassez-faire nation from now on, as it is walking the path where the principles of free market and invisible hand are forgotten, and government intervention –such as government spending– matters more than ever.

Here are several lessons we can draw from Greece’s case-in-study and its discrepancy to US. First and foremost, comparing the 380 billion dollar Greece’s debt and 13 trillion dollar debt of the US is somewhat misleading. The United States may possess 40 times bigger debt than Greece, but you simply cannot compare the economy of superpower like US and what they have in Greece. The economy of US is big, and so big that you can have ten countries like Greece combined and in you will still have a smaller economy than the US.

Second, during the last few years Greece is like a zombie waiting his name to be called by angel of death; in 2010 its debt stood at the highest level of 113% of its own GDP and thus it was no surprise when it eventually went bankrupt. But United States is not a dead man walking –at least not yet. Even though its current debt is tenfold compared to Greece’s, that 13-trillion-debt is actually ‘still’ around 90% of its GDP and at least Barack Obama can still breathe for several years before its GDP-to-debt ratio indicator flashes red.

And the third party to blame for Greece’s crisis is Euro. Because of the single currency policy, which Greece shared with other 15 European countries, the country did not have the independency of its economic policies and could not implement essential monetary actions to jolt its economy during the turmoil. The US dollar, by contrast, is a widely accepted currency around the world and becomes an enormous advantage for US who prints it.

Yet no matter how different the US to Greece at the moment; debt is still debt. The bigger your debt is, the higher the interest you will have to pay in the future; which literally means more and more burden your child and grandchild will share. It very much resembles nurturing a time bomb whose blast is just in the offing.

Obama’s spending spree is likely to continue as major solution to salvage the economy. But the question is: how long can he pour the money before the pump eventually runs dry?

It’s 93% of GDP-to-debt ratio which United States has at the moment. The future looks bleak for the Chicago kid.

1 comment:

Lukas Prakoso said...

It's no wonder that sub-prime mortgage crisis hit America hard. Their way of living by using debts is unimaginable.

But even if deep crisis happened to strike America once again, they will get out from it in the end, even it takes some time.

The solution to pay big debt is to borrow even bigger debt.

If you ask Americans, whether they can get out of this mess, they have already an answer for you: