Mr Ali Khwaja, Chairman of KTrade Securities, a Pakistani-based stock and commodity outfit, says the U.S. fiscal deficit can impact negatively on the global financial markets.
Khwaja disclosed this on Thursday during the global virtual analysis of the KTrade Securities research report.
He said that the deficit could create less trust by international market players and increase search for alternative currency.
According to him, the highlight had become important because the U.S. spending spree is creating massive risks for the global financial system, particularly the developing world.
Khwaja said that, as the U.S. government borrowed more, the resulting increase in interest rates would continue to ripple through global financial markets.
‘Right now, the U.S. is still able to borrow and attract capital from the rest of the world, but countries are feeling the pinch of rising interest rates.
‘In five years or so, most emerging and low-income countries that rely on external borrowing will need to use most
of their budget for the payment of interest cost.
‘Soon, other countries, especially large holders of the U.S. debt, will start asking questions about where the U.S. debt is heading, and they will take some policy options,’ he said.
He said that the situation could be dangerous, as the U.S. will have to defend its position by non-economic means.
‘For the U.S.,the solution is to allow a global free-trade movement that attracts younger people to come into the economy and thus, increase tax collection,’ he said.
He, however, said that such a move was unfortunate because the U.S. political choices were creating an equilibrium in which it will remain in fiscal deficit.
He observed that the U.S. fiscal deficit used to be around two to three per cent until the 1980s.
He said that the country soon ventured into uncharted territory, as it had been running a deficit in decades averaging around 10 trillion dollars per year.
‘In the past, there was this understanding that if you run a deficit, you run for some spe
cial reason in a temporary situation, such as world war, after which you will revert to fiscal discipline.
‘But since the 2008 financial crisis, the fiscal discipline upon which the global financial market and the global financial system rest, has been broken.
‘The situation will only worsen with the ageing American population, which necessitates increased spending on pensions, healthcare, and other benefits straining the fiscal budget, which failed to be fully replenished by taxes.
‘Political pressure to maintain popularity has led to increased spending. Cutting budgets can lead to political unpopularity and electoral losses, which creates a cycle of persistent high spending.
‘When a government realises that it can spend more money for political benefits, then it is difficult to control when it comes out of the bottle.
‘But popular political options are not always good economic options,’ he said.
He quoted Jodey Arrington, Chairman of the U.S. House Budget Committee as confirming the fiscal deficit, wh
en referring to the alarming accumulation of gross national debt that hit a new record of 35 trillion dollars.
Khwaja reiterated that the U.S. Congressional Budget Office had warned that the rate of increase, equivalent to 6.4 billion dollars of new debt per day, is pushing the U.S. fiscal sustainability to its limit.
He further said that by the early 2030s, government bills will exceed revenue and that the escalating debt trajectory raises concerns about the feasibility of financing and the associated costs.
‘Risks to economic growth and lower investment in the private sector could lead to lower wages.
‘This is due to losses in productivity. And upward pressure on interest rates would make it more expensive for individuals to borrow money,’ he said.
He further quoted Gene Dodaro, Comptroller-General of the U.S. and Head of Government Accountability Office (GAO) aa suggesting that measures should be taken to ensure lasting solution to fiscal deficit.
Source : News Agency of Nigeria