The US as deadbeat: discuss
Asked to name the biggest threat hanging over the global economy in 2011, most people will tell you it's the crisis in the Eurozone. Newsnight spent a lot of time debating its future only last night.
But since I'm moonlighting tonight as Newsnight's presenter, I decided we should also think about a more distant - but ultimately much larger - cloud on the global economic horizon. That is the possibility of a full-scale loss of confidence in US assets.
It's not an issue for the next few months, perhaps, especially with decent prospects for US growth in 2011. But both at the state and the federal level, America is awash with red ink, with debt rising "as far as the eye can see." Looking at these numbers, and America's dysfunctional politics, if investors ever started to question America's creditworthiness, or seriously sell the dollar, it could make the bailouts on the European periphery look like a tea party.
Ben Bernanke, the head of the US central bank got his first chance to address the New Republican congress today. He was cautiously optimistic about the US economy - too cautious for many in the markets - the dollar went down today on the back of his remarks, and some disappointingly weak new jobs figures. But this is what he had to say about the long-term threat posed by America's 1.4 trillion dollar federal budget deficit:
"It is widely understood that the federal government is on an unsustainable fiscal path. Yet, as a nation, we have done little to address this critical threat to our economy. Doing nothing will not be an option indefinitely; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be. "
If it were any other country, the ratings agencies would have got that downgrading pencils out for the US a long time ago. The US budget deficit last year was well over 10 per cent of GDP - and thanks to another round of tax cuts, it's going to be at least that high in 2011.
By contrast, the average deficit of the so-called "PIIGs" - the troubled Eurozone economies - was about 7.5 per cent of GDP.
Government debt is rising nearly everywhere, but the IMF forecasts that America's national debt will rise to more than 110 per cent of GDP by 2015 - compared to a developed country median of 81 per cent. And America is the only major economy to have just passes a fresh stimulus package for 2011 and 2012.
The new Republican congress has promised its 'tea party movement' followers that it will cut spending and "take back Washington". Republicans have already supported a new rule, whereby every spending increase has to be matched by a corresponding spending cut. That kind of mechanism has been successfully used in the past to keep a lid on deficits. But there's a big problem: on the new rule, tax cuts do not have to be paid for in the same way.
So, in the new Congress, taxes can go down - but they are extremely unlikely to go up. (Even though, as I've commented before - the IMF and others believe that the US is 'under-taxed'.) And, as the Economist pointed out last week , for all the talk of spending cuts - there is a zero support - in or outside Congress for cuts in the benefit programmes for retirees which take up an ever-larger share of the budget.
Though signs of faster growth have pushed up US bond yields in recent months, you have to say that investors have been remarkably calm about all this so far - for the usual reasons. The US is still the world's largest economy and the dollar is still the world's reserve currency. When it comes down to it, there aren't a lot of other places for investors to take their cash. But if the past few years have taught anything it is that once market doubts start to take hold, they can be very difficult to turn around.
Investors may spend much of 2011 watching Congress and the White House battle it out over the budget - with no agreement on any long-term strategy to cut borrowing. They may also shortly get a few frights at the state level, with serious questions now being raised about a California default or messy bailout, for example.
If any of that leads the financial markets to start questioning the creditworthiness of the US government - or the long-term value of the US currency - things in the global financial system could get quite ugly, quite fast.