USA in a Right Mess

This past week has shown a lot of media interest in the current conflict between the various political factions in the USA regarding their debt ceiling. The American political system is not a straight forward one. They have two houses, Congress, and the Senate. They have two major political parties, with one of them, the Republicans also encompassing the Tea party, which could be regarded as a splinter group. The Republicans have control of Congress, and the Democrats control the Senate. Overarching this is the President, who is a Democrat.

Many of the powers of the president are enshrined in the Constitution. When it comes to setting the debt ceiling, approval needs to be obtained from both the senate and congress. This is currently causing a lot of politicking. All the parties involved know that the debt ceiling must be increased to enable the country to not default on its debt obligations. They will not be able to meet government payrolls or social security payments within the next two weeks if the debt limit is not raised.

The Americans have got themselves into this mess simply by spending $1.40 for every $1 of revenue that they take in by taxes. Just like any normal family to balance the books they really have two choices. Cut spending, or increase revenue. Because the deficit is so large they really need to do both. That is the real quandary. Their economy is very fragile and either of these two measures will slow the economy further.

America is now paying a real price for spending trillions of dollars on conflicts in Iraq and Afghanistan. During that same period, it has also increased welfare payments and decreased taxes, particularly for the wealthy, and the oil companies.

It is not just the Americans who are paying for the on-going financial blunders of the American administration. Indirectly, countries like New Zealand and Australia are paying a big price through the collapse of the US dollar. Unfortunately many commodities are priced in US dollars. This is seriously impacting returns in New Zealand dollar terms. Over the past year, the impact is around 20%. Fortunately, this has occurred at a time when prices have been high.

There are of course some positives for New Zealanders thanks to this USA fiasco. Many imported goods have come down in price. Interest rates are also low. This is acting to reduce the rate of inflation. It may also prove to be a good time to take that overseas trip while our New Zealand dollar is so strong.

When it comes to investing, the current USA situation is causing a lot of uncertainty. Financial markets worldwide have shown a lot of volatility. This can provide some great buying opportunities. We expect that the American situation will resolve itself within a few days. The real question for the USA is going to be how serious are Americans about living within their means. That squabble will be on-going and no doubt great fodder for the media over the coming year.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.