World over everyone is seeing US with their eyes wide open, both culturally & financially. Almost carried away by the maneuvering of the FED by cutting interest rates in US. Amazed at the attempts by FED to bring back the slowing economy & alleviate the credit crunch of the Banks. Let me pen down where i think the problem is.
The term Current Account is used by economies to measure their trade position with other Countries in the World. Simply the excess of their value of exports over imports means the surplus position; excess of imports over exports means deficit position. Short-term current account deficit is not something dangerous but prolonged Current Account deficit plus the Capital Account deficit implies the country is borrowing for its own survival. Estimated U.S. public debt is currently $9 trillion. That's an average debt for 303 million U.S. residents of about $30,000, or for 135 million U.S. taxpayers of about $67,000. (The numbers are about six times bigger if we add unreported U.S. liabilities.)
How does a country borrow?. It can borrow from the Central Bank i.e FED incase of US. Then it means FED should have money left to lend and keep supplying for the deficit. So looking out for Central Banks in other Countries is the only option left for a country like US to meet its deficit. FED prints bonds and sells it to countries like China, India with surplus Forex Reserves. So in a way China, India are lending US to buy their own product/Services or to put it differently we are dependent on US economic performance. I think this is a double edged sword. If US goes to recession & if a Collapse of US Current account deficit happens then countries like China, India will be left with nothing but worthless bond papers; if China, India stop exporting to US due to burgeoning negative trade position, then the US economy will slow down which will in turn have repercussions World over.
Why is US faced with the problem of Fiscal deficit even though it is a Superpower. The undefined motto of the US governments is to increase the consumer spending to keep the economy growing. We could understand this from their policy statements & also the very words FED uses to measure economic growth i.e 'improvement in Consumer spending'. US wants to grow its economy by ensuring its people spend & keep spending. Even if spending is more than what the country could earn. This policy has stemmed from the fact that savings in US is not greatly encouraged, unlike countries like India. In India, for generations we are thought, saving for the future is a virtue. This idea of saving is linked to joint family system of living in India, wherein love, affection & respect for tradition takes over the individual's rights. In countries where an individual's rights are given more importance than to the rules/guidelines for living in a society people tend to lead an ultra morden life stlye.
International Monetary Funds (IMF) concern on the burgeoning trade deficit of US proves this is true. So the time bomb of financial crisis/collapse is ticking in US. We need to take a call, should we keep funding the US for the irresponsible policy of the US state to encourage spending by its people. We can choose to be doomed or be clear of our priorities, which should be to use the surplus Forex Reserves to build infrastructure for our Country. Even though China is investing a lot in US bonds, they are at the same time building massive infrastructure, which we never could imagine. Recent news that a bridge for 36 kms connecting 3 cities in Coastal China is an example in itself. America’s consumer debt bomb is ticking louder and louder in a climate where the artificial depressants to interest rates and debt service are on thinner and thinner ice.
An introspection worth doing. "Are we waiting for the Bomb to explode?"
