Jürgen Orstrom Mueller, former Minister of State for the Royal Danish Foreign Ministry, says that it is not excluded the return of the financial crisis that swept the world in 2008-2009, pointing out that the United States absorbs capital from the rest of the world to solve its domestic economic problems, and it is expected that this will not be available next time.
minister explains At an article location “The National Interest” US ( National Interest ) – The administration President Joe Biden launched largest financial expansion ever by pumping $ 1.9 trillion into economy, which is equivalent about 9% of GDP, and award The desired is economic growth in 2021 of 6.4%, and 3.5% in 2022, and the unemployment rate will be halved from 8.1% to 4.2% if the fiscal expansion goes according to plan, but can this happen? Read also How did the US contribute to China’s GDP growth? Why does America buy oil from abroad even though it is the largest producer of it? In light of the Corona crisis.. a list of the most important commodities in which a shortage was recorded and affected the American economy Is the United States drowning in debt?
Mueller continues, saying that the impact on the federal finances, which is already in dire straits, will be devastating, as the federal deficit amounted to 14.9%, in 2020, of GDP. It is expected to be around 10% in 2021, and 4.6% in 2022, and even with a relatively rosy outlook for growth levels and interest rates, it will fluctuate between 3.6% and 5.7% over the course of the year over the next ten years.
In 2019, the US accounted for 41% of the global savings deficit, but at that time, the balance of payments current account deficit was 2.2%, and with a forecast of 3.9%, extrapolating to 60% and 70% in 2021.
The writer pointed out that the United States sucks capital from the rest of the world to solve its domestic economic problems. And other debtors, especially developing countries, do not have much choice, but we see that the savings of these debtors are transferred to the United States despite the damage to their economy, and higher growth of the United States means higher imports, which may help other countries, but mainly industrial and rich countries resources, leaving weaker, less developed countries in stagnation and more likely to default.
Federal Reserve inaction
The Fed’s medium inflation targeting policy says that inflation may exceed 2% modestly and temporarily to offset previous low inflation, and the Fed takes a moderate view that the 4.2% rise in the consumer price index last April is consistent with this policy, and may be The trend is less favorable, the average monthly inflation between last January and April was 2.5% compared to a monthly average for 2020 at 1.2%, the market has been disturbed by the inaction of the Federal Reserve, and the 10-year Treasury rate has increased over the past year from 0.58 % to 1.58%.
The writer doubts that if the trend in CPI and Treasury price continues for 10 years, the Fed will not be able to stop, and the US economy may be able to tolerate higher interest rates, at least in the short term.
But a large number of countries, especially those already weak, may not be able to, and since money cannot be in two places at the same time, developing countries facing a terrible debt burden will not have the money to meet their basic needs, and the outcome may be poor.
The external debt of developing countries is now close to a third of GDP, and it is expected to rise even more, and one might expect indebtedness to shrink since the global financial crisis of 2008-2009, but nothing of the sort has been done, debt has doubled as a proportion of GDP Total, the composition of creditors has taken a turn for the worse, and 10 years ago, almost half of the debt was owed to private creditors, and now about two-thirds of the debt is owed to creditors in the same sector.
If local debtors face a problem, the government will have to bail out but it doesn’t have the money, and the door will not open for global financial institutions because the governments themselves are overburdened with debt.
The defaults of most creditors, who are private financial institutions around the world, including those with major US defaults, will echo through their already strained balance sheets in the local economy, and the result could be a resurgence of the 2008-09 crisis. Usually, the government is asked to act as a lender of last resort (because it is too big to fall), but this time the US government is heavily indebted.
The article concludes that the result will be that the United States must accept the default of major financial institutions to allow life to continue.