Is the US’s growth sustainable ? 7



 

The polls have ended.

 

In our second “Have Your Say !” segment, your opinion was sought on whether is the US’s growth sustainable.

61 % voted No

39 % voted Yes

In the aftermath of the 2008 finincial crisis, i believe that the markets have taken a liking to rewarding and punishing based on sentiments. The age old concept of fundamentals is now an area of ambiguity.

The S&P 500 went from 1400+ at the end of 2007 to 900+ at the end of 2008.

At the end of 2011, the S&P 500 was at 1200+.

While the index has almost recovered to it’s 2007 levels now, many other sectors of the economy beg to differ.

The US unemployment rate was at 5% at the end of 2007 and 8.5% at the end of 2011.

Many people remained unemployed and this is a contrast to the US equities.

The housing market still faces challenges and foreclosures are still happening.

 

I personally believe that real growth comes with real debt reduction too. Otherwise it will be like telling your mum that you have saved $100 but yet you again borrowed $50 from your neighbor down the street.

 

US Total Debt by Year

Chart created using http://www.onlinecharttool.com/

 

A look at the US Total Debt by Year chart above tells us that the debt is increasing.

This is a dangerous situation because we all know what is happening over at the Euro Zone. A failure of confidence towards the troubled countries and hence an extremely challenging refinancing situation.

Due to the US’s status of the world’s reserve currency and the “too big to fail” belief, it remains somewhat immune to the scrutiny of the sentimental markets for now. However it must tread carefully as any major setback of it’s economy risks opening the can of worms.

One may think that the US can simply print more money / weaken it’s currency in a bid to “pay” off it’s debt. However the implications are far wider. An excessively weaken currency will upset the economic balance and dampen demand for the US dollar. An eventual lose of it’s status as the world’s reserve / currency of choice for international trade may happen and along with it, the ease of trade for the US.

One may notice that the debt increased at a slower rate from 2010 to 2011. This is encouraging and more must be done to reverse this increasing trend.

 

In conclusion, while one wonders if this growth is sustainable, i wonder where is the real growth. The US is in a fragile balance play between the value of it’s currency, the sentiment towards it’s economy and the management of it’s debt. Time is running out and the US must fix it’s debt problems before the cat is let out of the bag.

 

Thank you readers for your time and why not head out to vote for the new Have Your Say ! poll?

Has China reached it’s peak ?

China has come a long way. From a largely rural third world economy, it is now a world economic power. Has the party reached the peak?

Have your say at the home page!

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  • I hope everyone finds this article useful.. i would love to hear your comments..  do remember to take part in the new poll at the home page 🙂

  • The first thing is that US debt is increasing at a fast rate. However it remains at levels which are sustainable. Even an increase to $20 trillion would remain sustainable. However the more the debt rises, the greater the risk of default. Since the FED are responsible for the money supply, any default is likely to be by way of further dilution. This will be achieved by the purchase of further debt. Alternatively there could be haircuts for those holding US debt.

    This will create two problems. The first problem is quite simply that at some point in the future, the debt will have to be repaid. That burden will rest on the next generation and possibly the one that follows. It is hardly a legacy of which any American citizen should be proud. It really does not give your children the best start in life. Further it does not accord with the American way of life and the dream of the founding fathers.

    The other problem is more serious. As the debt increases, so does the risk of default be it by an actual default or by dilution. Now as the risk of default becomes a reality, US debt will start to be less attractive. It is likely that the Dollar will lose its status as the worlds reserve currency. Once the Dollar ceases to be the worlds reserve currency, there will be no need for nations to hold Dollars. Those Dollars that are being held will be sold to purchase the new world reserve currency. The value of the Dollar will plummet. I have predicted that once EUR/USD has tested parity or close there to, it will then head to the 2.00000 level. If this scenario were to occur then I believe we will see 4.0000. Now I do not believe this will occur.

    If America were to lose its status of having the world reserve currency, it would also cease to be the one remaining super-power from the efforts and sacrifices of the people to win the Cold War.

    Thus there is a wake up call to the US Administration to start to look at way of reducing the deficit. It is really up to the American people to determine what legacy they leave to their children.

    • I like your mention of the American dream and the founding fathers. Indeed the US came a long way. I can go on and on discussing about history and wonder how the US came to this stage.. the two wars recently? the expenses of being the world police? etc etc  but i guess this is beyond the scope of this website …

  • ade

    nice one

  • Gold futures were higher in Asian trade on Friday.

    On the Comex
    division of the New York Mercantile Exchange, Gold futures for December
    delivery traded at USD1795.05 a troy ounce at time of writing rising
    0.08%.

    It earlier traded at a session high USD1798.05 a troy
    ounce. Gold was likely to find support at USD1765.75 and resistance at
    USD1798.05.

    US Dollar Index, which tracks the performance of the
    greenback versus a basket of six other major currencies, rose 0.03% to
    trade at USD79.44.

    Elsewhere on the Comex, Silver for December
    delivery rose 0.14% to trade at USD35.052 a troy ounce while Copper for
    December delivery rose 0.15% to trade at USD3.795 a pound.