US fis­cal and gov­ern­ment debt woes fu­el­ing fears of the mak­ing of new fi­nan­cial cri­sis

Global Times - - Biz Comment - By Hu Wei­jia

Ten years af­ter the global fi­nan­cial cri­sis ig­nited by Wall Street gi­ants, the US’ wors­en­ing fis­cal out­look and mount­ing gov­ern­ment debt are fu­el­ing fears of a new cri­sis that could plunge the world econ­omy into re­ces­sion once again.

The wors­en­ing fis­cal out­look is not an im­mi­nent threat to the global econ­omy, but the risk of a global re­ces­sion is real, and coun­tries need to take im­me­di­ate ac­tion to strengthen their de­fenses.

The US econ­omy is ex­pe­ri­enc­ing one of the long­est ex­pan­sions on record, but the dam­age of Washington’s bud­get deficit is hid­ing in plain sight.

Some an­a­lysts have fore­cast that the fed­eral deficit will reach $1 tril­lion by the end of this fis­cal year.

Tax cuts and in­creased gov­ern­ment spend­ing are big fac­tors in the cur­rent eco­nomic boom­let in the US, but fis­cal stim­u­lus is the main rea­son be­hind the ac­cu­mu­lated deficit. The next fi­nan­cial cri­sis faced by the US may be caused by its in­creas­ing fed­eral deficit, be­cause that deficit may force the gov­ern­ment to cut core pro­grams to re­duce its an­nual ex­pen­di­tures.

One of the worst-case sce­nar­ios is that the US gov­ern­ment will print more money and prop those pro­grams up, lead­ing to a sharp de­pre­ci­a­tion of the US dol­lar.

Bil­lion­aire hedge-fund man­ager Ray Dalio fore­cast the US econ­omy is roughly two years from a down­turn, which will see the dol­lar plunge by as much as 30 per­cent, cre­at­ing a “dol­lar cri­sis,” ac­cord­ing to Bloomberg.

A dol­lar cri­sis is likely to cre­ate an eco­nomic rip­ple ef­fect in the global econ­omy and trig­ger a down­ward eco­nomic cycle.

In global trade, the use of the dol­lar is quite wide­spread, and a steep fall in the dol­lar is likely to deal a heavy blow to emerg­ing economies’ ex­port sec­tors.

Fur­ther, the bull mar­ket in the US is al­most nine years old. As stocks keep climb­ing, more and more an­a­lysts have be­gun to think the mar­ket has peaked. Any ex­ter­nal fac­tors, in­clud­ing a dol­lar cri­sis, are likely to be a turn­ing point for the mar­kets.

The US fi­nan­cial sys­tem poses one of the biggest risks to global fi­nan­cial sta­bil­ity, and emerg­ing economies should re­main vig­i­lant.

The au­thor is a re­porter with the Global Times. bi­zopin­ion@ glob­al­times.com.cn

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