Oliver's Insights - US public debt - how big a threat?
4 May 2011 - This note looks at the threat posed by America's huge budget deficit and ballooning public debt.
The key points are as follows:
- America's public debt situation is a major issue for investment markets going forward. Currently it is in worse shape than Spain and Portugal and long-term projections suggest it is on an unsustainable path.
- Inflating its way out of the problem is not an option for the US, so sooner or later significant fiscal austerity is likely. This will probably start next year, though real action is unlikely until after the presidential election late next year. This is all likely to result in a constrained medium-term growth outlook for the US, with a possible cyclical economic slowdown in 2013.
- While America' fiscal woes are unlikely to derail the current cyclical recovery in global shares, for investors it likely means longer-term downwards pressure on the US dollar, ongoing interest in hedges against a falling US dollar such as gold and the Australian dollar, an ongoing source of volatility for investment markets and constrained longer-term returns for US shares compared to shares in emerging countries.
