Economic Steroids

28 August 2012

he US budget deficit for 2012 is projected to reach $1.1 trillion, a whopping 7% of GDP. It is deemed necessary stimulus in attempts to lift the world’s largest economy from persistent doldrums.

When one puts this in perspective against the possible overall GDP growth rate of possibly just around 2% or 3% if we get lucky, it is very obvious that the US economic recovery is far from satisfactory. In fact, it is so clearly dependent on the government stimulus, which is clearly unsustainable.

The market participants do mention the term ‘fiscal cliff’ every now and then, which pretty much just means the sudden, significant reduction in the budget deficit, and the likelihood of it driving the economy back down into recession.

In the short-term, actually we feel that somehow the parties will compromise and fiscal cliff could be averted.

Without other engines in the economy firing ahead at significant speed, however, this basically means that the recovery still relies heavily on government stimulus, thus continued increase in the federal debt burden. The US has been on this path for several years by now. This cannot last forever.

Perhaps the US government should at least look at the composition of their spending more closely following this year’s election to maximize the multiplier impact in order to get the desired result, i.e. it finally does trigger, stimulate recovery in the broader economy, which hopefully in turn can make it less and less reliant on government care.

For the next year or two, it looks like the economic steroid may still be needed, especially in the face of slowdown in other major economies, not an advantageous environment for the US economy to restore its strength.