US must undertake a midcourse correction

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US must undertake a midcourse correction

Saturday, 27 May 2023 | K A Badarinath

US must undertake a midcourse correction

Even if the US revises its debt ceiling of $31.4 trillion, its risk-ridden economy may precipitate a global crisis of a larger magnitude

With the looming debt crisis in the United States with the potential to default, a showdown between Republicans that control the House and the democratic white house may not augur well for the global economy and developing countries like India. Owing unsustainable economic policies over a few decades and irresponsible handling of resources has led the largest global economic powerhouse into a big mess of its own making. Even if president joe Biden manages to clinch a last-minute deal with Republican top leadership to push up the debt ceiling beyond us $ 31.4 trillion, larger questions continue to haunt the Americans. Mobilizing loans through US bonds or debt paper may not be the immediate concern but potential default on June 1 is what may turn catastrophic to not only Americans but the entire world. For Americans, it means that democrats will not be able to fund their fancied social security payments on medical and health insurance, pension or social development projects.

 President Biden and his Democratic administration will have to put on hold all fancy projects like waiving student loans or fees to provide personal tax concessions to youngsters and new taxpayers democrats understand the full importance of lifting the already unsustainable debt limit of $ 31.4 trillion. In fact, this also explains US President Biden's decision to forgo the scheduled quad summit in Australia and head back home after the G-7 leaders meeting in Hiroshima. Eventually, the quad summit had to be called off with heads of the US, Australia, Japan and India meeting briefly at Hiroshima on the sidelines of the G-7 congregation. The larger issue that confronts us and the world is a wee bit different and difficult.

 There is every possibility of us moving into economic recession thereby stymieing demand for goods and services globally. This will hit the economic growth sentiment internationally big time. Secondly, the possibility of banks getting stuck with worthless dollar-denominated bonds or debt paper in the medium term cannot be ruled out unless both the federal reserve and political leadership in the US take recourse to the mid-course correction that involves massive spending cuts or improve the country's revenues. Such a policy may be very unattractive for Democratic voters when they have to elect their president in 2024.

Thirdly, containing the contagion effect of the US economy moving into the abyss will be a herculean task. One cannot easily forget the global financial crisis triggered by real estate-linked mortgages that turned worthless in 2007-08. This housing bubble stirred a perfect storm to impact both large developing countries like India as well as least developed countries alike. Excessive risk exposure taken by banks was the biggest element in this crisis of the worst kind after the great depression of 1929. Fourthly, if the US default finally happens, then countries like India having huge exposure to American greenback will also face the heat.

But, this diversification should go the whole hog and consciously lead to pursuing the de-dollarization of the Indian economy as a state policy. Fifthly, while exports to the US become attractive and import bills get squeezed, a demand slump globally will negate the advantages gained in trade deals. There is no reason why India should not pursue a more independent trade and currency policy keeping herself at a safe distance from the federal reserve and recalibrating her linkages with Washington DC. Sixthly, Democrats and Republicans must work towards mid-course correction on the economic and development front rather than recklessly going for borrowing more from Tom to pay Peter.

Limiting the fresh debt limit to us $ 1.5 trillion till March 31, 2024, and achieving concomitant cuts in spending by us $ 1.47 trillion would save the perilously placed our economy. Seventhly, precipitating a perfectly cooked crisis is not in anyone's interest and hence reining in the fresh spending to less than one per cent as per the limit, save, grow act of 2023 makes eminent sense. On the parallel, limiting the mop-up of fresh debt and gradual reduction in existing debt stock would augur well for the US economy that’s seeking to reposition itself and instil confidence in its trading and investment partners.

The debt-to-GDP ratio was approximately 97 per cent at the end of FY 2022, and under current policy and based on this report's assumptions is projected to reach 566 per cent in 2097, it pointed out. While pursuing a revised economic policy dispensation, president biden should not easily forget the 2011 crisis that was triggered by our congress. This pushed up the borrowing costs for the treasury by a humongous us $ 1.3 billion in just one year. Also, we should not provide any leverage to China for en-cashing its crisis. China is easily the largest holder of us debt paper, notes and long-term bonds with valuations ranging from $ 859.4 billion to $ one trillion.

China may like to leverage our debt paper to rebalance its own resources position which again may not be looking too good. China's own debt of us $ 14.34 trillion as of April 12, 2023, and swelling at a whopping $ 3.81 trillion annually may not be something to brag about by president xis oligarchs driven communist party. Potential defaults in us, and machinations in China have valuable lessons for India that are overtly conservative on borrowings, especially by the Narendra Modi government.

(The author is the director and chief executive of this non-partisan think tank based in New Delhi)

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