Standard Life Investments, the global investment manager, suggests that US public debt is fast approaching levels which could seriously damage future growth prospects.
Addressing this problem will be an important focus for politicians in the run up to, and after, the Presidential election in 2012.
In the latest edition of Global Perspectives the leading investment house examines the debt burden facing the USA, in the light of the recent downgrade to its credit rating, and the potential impact on financial markets.
Douglas Roberts, Senior International Economist at Standard Life Investments noted:
"After years of living beyond its means, the US economy is in for a period of significantly slower growth, whatever the outcome of next year's Presidential election. Given estimates about what needs to happen to spending and taxes just to stabilise the debt/GDP ratio, both private and public spending trends will be much less robust going forward. But, if the politicians fail to grasp the nettle, it will be damaging levels of debt that will hinder economic expansion. The ramifications of the rise in debt levels have persuaded some to dub the economic outlook as the ‘new normal', in which the economy will typically grow more slowly, say by 1-2% rather than 2-3% a year, and in which unemployment levels will be higher than normal. The US is not the only economy facing this reality, but it is the most high profile.
"The imperative for a clear political plan to address the fiscal challenges presented by the level of public debt was effectively raised at the recent Jackson Hole summit by several central bankers. The outcome of the 2012 elections could help to define just how serious an attempt is made to rein in the deficit. But, unfortunately, the checks and balances of the US political set-up are more likely to see a continuation of the present log-jam. If that were to be the case then there could be a return of the bond vigilantes - those bond investors who oppose government policies that they regard as inflationary, by selling bonds and driving yields up.
"Whatever way the correction comes about, it will happen - the problem is knowing when. As Reinhart and Rogoff pointed out in their study(6), ‘levels of debt of more than 90% of GDP are relatively rare'. And, as Herb Stein quipped ‘if something can't go on forever, it will stop."
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