US in Debt Again - What Can Small Islands State Learn from This?

US in Debt Again

The President of the United States of America, President Barak Obama addressed the citizens of America in various TV Channels to appeal for their “understanding” of the debt ceiling that the Federal Government is planning to increase by $1 trillion to keep the government running. Analysts in the US and around the world are watching as to what the Federal Government is planning to do and more importantly, trying to ascertain answers to the question, how did they end up here. It is best that we (small island nations) also analyze the economic repercussions of all these from our perspective especially being recipient of development assistance from the US for number of years.

Debt Management

In the US, raising the debt ceiling is stipulated in their constitution. There is nothing sinister about such macroeconomic practice. President Obama in his live broadcast justified that President Ronald Regan and President George Bush both raised the debt ceiling in their reigning times not only once but on several occasions and now he is appealing that it is necessary to do it again. Apparently, most of the American citizens know that raising the debts ceiling is a short-term plan to reduce debt, however, the root of the problem is government non-economical spending, that needs to be reduced significantly.

As different economies deal with their fiscal undertakings differently, the world is now watching as to how the US will manage such situation especially when they are running out of time and the politicians are not so keen of assisting the Federal Government in raising the ceiling. Macroeconomic theory suggests that raising the debt ceiling cushions the expenditure so that it does not exceed revenue by a significant amount. Other fiscal options are available for the US government to take, but given their study and knowledge of their economy, raising the debt ceiling is their best fix for the moment.

What Does This Mean?

A date has been set and that is 02nd of August, which is also the Federal Government’s due date for some of their important bills. In the event they still have not decided nor agreed to the steps to be taken, they would probably be defaulting on some of their payments. First to the US citizens, they were told that the important obligations that the government need to pay are basic necessities such as social securities, civil servant salaries and the repayment, and interests of government bonds domestically and international.

While it may sound dramatic the financial problem is real and consequences is devastating, especially to an ordinary citizen. IMF released a statement recently saying “it should be self-evident a debt default by the US government ... would have very serious, far-reaching, dramatic repercussions and that’s why we’re confident that it will be avoided.” I have not heard from the US President about their commitment to foreign aid in this traumatic time as yet, but what I gather is that their priority is to put food first on the table before worrying about other things.

The US has always championed development assistance in foreign countries; this is something that will now be tested. While talks are already happening, it will be interesting to see what the Congress will do, particularly when they themselves are looking for money to pay for their basic necessities. I suggest we should not expect too much in such trying times but hope that an amicable solution be reached not only to save the US citizens but the rest of the underdeveloped and developing world that look to US for much needed assistance.

Apart from that, most of our foreign reserves are in US Treasury Bills. As usual, major stock markets are slowly moving away from US dollars for safety measures. This had seen the declining in the value of US dollars on a daily basis. Ultimately, our foreign reserve may not be the value that we expect it to be and in my view it is in our best interest to follow the lead and slowly move towards a stable currency for our foreign reserve. Sounds a bit dramatic but given the current impasse within the Congress, precautionary measures is always good.

What Lessons Can Be Learnt?

Well, there is a of lot debate regarding the subject matter. The US has been practicing this behavior for a while. In economics, the principle to follow is much simpler than the act of following. If we have to solve the issue via fiscal policies the government spending and taxes are the two avenues we can start from. Unfortunately many of us especially those in the government always think that this is not affordable for varying reasons. Even IMF thinks that striking the right balance on fiscal policy is the main challenge facing the US economic officials today.

Well for us small islands states, it is now evident that budgetary control is something that does not need a quick fix. It needs elegance, discipline and a sustainable economic practice with zero tolerance of rent seeking behavior. Fiscal steps of proper tax systems is inevitable and proper spending of government on economic activities that will eventually bring return should be our main fiscal focus. Lastly we need to have economic officials that have the ability and the skills to be creative and give sound advice to our leaders who then will have the moral ability to sacrifice and implement a prudent budgetary system that has a self-healing mechanism instead of looking for assistance abroad to even fund our budget deficit.