A fiscal review of 2007

[Ace Pace]

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The US is in trouble, and the trends are not good. The question is, with the mega-trends that are firmly in place – rapid economic expansion across Asia, a rapidly depleting supply of fossil fuels, a global threat to sustainable growth, and an aging population – is the US on an inexorable path downward that can only be checked and not stopped? A home-grown mortgage crisis and its worldwide ripple effects, together with a slowing economy, inflationary pressures, a war and a plummeting greenback now severely challenge American policy-makers.

The US is caught in a vicious cycle that impacts the economics, politics and foreign policies of its allies and its enemies, and poses a crisis for not just itself but for the world. With its house in fiscal disarray, the US has precious few options for stabilizing a weak and much-derided dollar. Raise rates, and it threatens the domestic economy, a gravely-damaged banking sector and further hastens the downward trend of housing prices. Drop rates, and it threatens foreign investment in dollar-denominated assets, may not jump-start domestic consumption and, in fact, further weaken the dollar in the process. There are no easy answers for a country with a deficit measured in the trillions, spending hundreds of billions annually on unproductive military activities, suffering its worst banking crisis in a generation and nearing the end of a 25 year bull run.

It wasn’t that long ago that observations of a “flattening world” dominated the US discussion, offering both risks and opportunities for a productive, (seemingly) healthy US economy bent on capitalizing on its culture of innovation. China, India, Russia and others offered deep pools of intellectual capital that could be tapped by US innovators to move their ideas forward in a highly flexible, cost-effective manner. Two years hence and the US dialog with the world has changed markedly, reminiscent of the 1970s when rocketing energy prices, rampant inflation, crushing interest rates and its conflict with Iran cast a pall upon market sentiment and the mood of the entire nation. Question such as “Are the Arabs going to buy the US?” and “Is the dollar ever going to recover?” were the issues of the day. Just like today.

As bad as things seem, the US is a tough, resilient country of innovators. It will take hard work to get the US back on track. Restoring confidence in its financial institutions. Taking the bitter pill of a real estate correction that will provide a healthy base off which to resume growth. Committing to addressing the politically-sensitive overhang of Social Security and health care costs, which if left unchecked will cost its children and grandchildren a chance at economic prosperity. Fixing its own house is the only way for the US to restore its position as a credible, thoughtful, and respected leader in an increasingly balanced global stage. The time for painful change is now, for the betterment of the US and the rest of the world.