Someone thinks America will collapse soon...

[NJ5]

HappySqurriel said:

NJ5 said:

HappySqurriel said:

NJ5 said:

So Obama and congress leaders finally made a deal which hasn't been voted on yet, "cutting" around $2 trillion (i.e. spending $200 billion less per year than previously planned, which still means spending will increase).

This is not the $4 trillion that S&P was calling for, so will the U.S. get downgraded?

You forgot to mention that a small increase in interest rates on government debt will soon erase all of these so-called cuts, and interest rates will likely increase by far more than that in the not too distant future ...

Yeah, they're so low that they don't really have anywhere to go but up (although Japan did manage to maintain low interest rates for a veeeery long time).

Japan has a lot of things working in its favour though, primarily that it is an export driven nation with most of its debt held domestically ...

My concern for the United States is that right now every 1% increase in interest rates translates into an 8% increase in the deficit, in the near future this could be a 10% to 12% increase, and interest rates can increase 5% to 10% and still be considered historically average. The US government may be able to maintain interest rates at low levels for quite some time but (on the current path) they will eventually hit a point where the high deficit and high debt levels requires higher interest rates to maintain them, which creates a nasty feedback loop because these higher interest rates translate into a higher deficit and debt level.

While I doubt this point will be reached in the next 18 months, unless something changes the US will probably be in crisis long before you're in the 2016 election cycle; and possibly before you're in the 2014 mid-term elections.

As you well point out, the interest portion of the budget can become a big problem, but the normal spending part can also, because if it's decreased drastically (and it will probably "have" to be, in order to avoid the feedback loop you talked about), that will impact GDP which decreases tax revenues, another nasty feedback loop which increases the debt to GDP ratio...

Between a rock and a hard place hardly begins to describe the worse (but likely) scenarios.