By Abbas Fazalbhoy
If the Dow Jones stock exchange was the box office you’d say the theatres were playing a bunch of really bad movies. It all began when the United States was unable to pay its short term loans and was forced to pass The Budget Control Act to increase the debt ceiling and reduce government spending. Markets around the world crashed soon after and following the Standard & Poor’s downgrade of the US Credit rating, the Dow had the single worse day in three years.
So is the US really bankrupt? The shorthand answer is no. But, the nearly $2B annual deficit of the US needs funding. To meet such a shortfall, the government usually borrows money from investors, banks and other governments and issues bonds. But, to pay the interest on these bonds, the country has no choice but to borrow more money. To avoid constantly borrowing, the US then prints more currency which devalues the Dollar because the more the availability, the lesser is its value. Commodity prices then rise because the same Dollar can now buy less and this inevitably leads to inflation. Thus, like any sovereign country that prints its own currency, the US cannot go bankrupt because if needed it will just print more notes but in the bargain, will also face increased inflation. On the other hand, the constant borrowing makes the US appear richer and the lending countries poorer, leading to outsourcing jobs and investments overseas to make use of the cost advantage. In the long run, this leads to a further deficit and eventual recession. A classic catch 22 situation – the combination of inflation and recession has meant that the US can neither raise taxes nor cut spending.
But all is not lost. There is still a ray of hope at the end of the tunnel. For example, Apple Inc., the Silicon Valley giant, recently surpassed Exxon Mobile to become the most valuable company in the world and the stock market seems to be bouncing back. Apple also has $82B in cash which is greater than the current US short term debt, an amount that the US was unable to pay. If this is any indication of the path North America needs to take then funding innovation will be the key in the future and investing in jobs that are based on intellectual property rather than on manufacturing will be the cornerstone for growth. Warren Buffet says, “Be fearful when others are greedy and greedy when others are fearful” and this might be the ideal time to invest confidence in the country that is synonymous with technology and innovation.
Abbas Fazalbhoy is currently pursuing his MBA at McMaster University majoring in Strategic Business Valuation. He has held several management positions in the IT arena and has worked closely with software development. Abbas currently works as Business Analyst at the RIC Centre.
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