Russian Prime Minister Vladimir Putin has accused the United States of living beyond its means "like a parasite" on the global economy and said dollar dominance was a threat to the financial markets.
"They are living beyond their means and shifting a part of the weight of their problems to the world economy," Putin told the pro-Kremlin youth group Nashi while touring its lakeside summer camp, some five hours drive north of Moscow, on Monday.
"They are living like parasites off the global economy and their monopoly of the dollar," Putin said at the open-air meeting with admiring young Russians in what looked like early campaigning before parliamentary and presidential polls.
Putin noted that Russia holds a large amount of US bonds and treasuries.
Binyamin Appelbaum, Catherine Rampell August 3, 2011
Even as the US Congress escapes from its brush with default, political divisions have all but immobilised the levers of fiscal policy, raising pressure on the Federal Reserve to address the nation's economic lethargy.
Failing to raise the debt ceiling could lead to an economic catastrophe. But even if the Senate joins the House of Representatives in agreeing to let the government borrow more money, there is mounting evidence that the political turmoil has made a bad economic situation worse.
Manufacturing activity declined last month. Unemployment is climbing. So is inflation. And the high pitch of partisan rancour in Congress makes it difficult for either party to advance their incompatible economic agendas.
The deal to raise the debt ceiling would reduce federal spending this year by billions of dollars, exacerbating a broader downturn in federal aid as the stimulus peters out. A payroll tax cut and extended benefits for the unemployed are scheduled to expire at the end of the year.
Ben Bernanke, the chairman of the Federal Reserve, said earlier in the year it was time to see whether the economy could stand on its own. Last month he said the Fed would consider new steps if conditions deteriorated significantly. As the Fed's policy-making committee prepares to meet next Tuesday, the drums are beating louder.
''I don't think they can do anything until we see how much was lost and how much we can recoup,'' Diane Swonk, the chief economist at Mesirow Financial, said. ''But if we have persistent weakness and stagnant employment growth through the third quarter, I just don't see how they can't step back into the game.''
The Fed is engaged in a massive and unprecedented effort to boost economic growth. It has held short-term interest rates near zero for almost three years and amassed more than $US2 trillion ($1.84 trillion) in treasuries and mortgage bonds to hold down long-term rates.
But since the end of June, when it completed its most recent round of asset purchases, the Fed has chosen to stand pat.
China has warned that tortured efforts to raise the US debt ceiling had failed to defuse Washington's "debt bomb", and that it would further diversify its currency holdings away from the greenback.
US President Barack Obama finally signed an emergency austerity bill on Tuesday that averted what would have been a catastrophic debt default for the world's biggest economy.
But a failure to rein in US borrowing could "jeopardise the well-being of hundreds of millions of families within and beyond the US borders", the official Xinhua news agency said on Wednesday in a blistering commentary on the deal.
"The months-long tug of war between Democrats and Republicans ... failed to defuse Washington's debt bomb for good, only delaying an immediate detonation by making the fuse an inch longer," the commentary said.
"Meanwhile, the madcap farce of brinkmanship has disclosed yet another ticking bomb in the heartland of the sole superpower in the world - the crippling tendency to politicise the economics while trivialising the politics."
China, sitting on the world's biggest foreign exchange reserves of about $US3.2 trillion ($2.98 trillion) as of the end of June, is the largest holder of US Treasuries.
Italy is the trigger point. If Italy defaults, then all hell is going to beak loose. The rather amusing side of this is that at the moment, the UK is looking like a safe haven.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
By Betsey Stevenson and Justin Wolfers May 29, 2012 9:00 AM ET
Europe is crumbling. China is slowing. The Federal Reserve is dithering. Yet the biggest threat to the emerging U.S. economic recovery may be Congress.
John Boehner, the leader of the House Republicans, has promised yet another fight with the White House over the debt ceiling -- the limit Congress has placed on the amount the federal government can borrow.
If this sounds familiar, it’s because we suffered through an identical performance last summer. Our analysis of that episode leads to a troubling conclusion: It almost derailed the recovery, and this time could be a lot worse.
Sometime around the end of this year, the federal government will bump up against its $16.4 trillion borrowing limit, as a direct result of spending and tax laws enacted by Congress. To raise the limit, legislators must pass a separate law. In principle, the extra level of approval can serve as a useful mechanism, forcing Congress to debate its priorities. But refusing to raise the limit wouldn’t free the government of its existing spending obligations. Rather, it would leave the government with no choice but to default on its debts.
In other words, congressional Republicans are taking the government’s creditworthiness hostage when they threaten not to increase the debt ceiling. Politically advantageous as this may be, it is terrible economics. To understand why, let us consider the economic effects of last year’s debt-ceiling debate. If we know our history, perhaps we will not be doomed to repeat it.
Confidence Drop
High-frequency data on consumer confidence from the research company Gallup, based on surveys of 500 Americans daily, provide a good picture of the debt-ceiling debate’s impact (see chart). Confidence began falling right around May 11, when Boehner first announced he would not support increasing the debt limit. It went into freefall as the political stalemate worsened through July. Over the entire episode, confidence declined more than it did following the collapse of Lehman Brothers Holdings Inc. in 2008. After July 31, when the deal to break the impasse was announced, consumer confidence stabilized and began a long, slow climb that brought it back to its starting point almost a year later. (Disclosure: We have a consulting relationship with Gallup.)
Businesses were also hurt by uncertainty, which rose to record levels as measured by the number of newspaper articles mentioning the subject. This proved far more damaging than the regulatory uncertainty on which Republican criticisms of Barack Obama’s administration have focused (more on that subject in a Bloomberg View editorial today). Employers held back on hiring, sapping momentum from a recovery that remains far too fragile.
Growth in nonfarm payrolls decelerated to an average 88,000 a month during the three months of the debt-ceiling impasse, compared with an average of 176,000 in the first five months of 2011 (see chart). Payroll growth subsequently recovered and has averaged 187,000 jobs a month since. Despite the rebound in job growth, employment is likely still below where it would otherwise have been.
There are also more visible permanent scars. The sense that the U.S. political system could no longer credibly commit to paying its debts led the credit-rating company Standard & Poor’s to remove the U.S. government from its list of risk-free borrowers with gold-standard AAA ratings. Just as a poor credit score raises the interest rate you pay in the long run, so a worse credit rating will probably raise the interest rate on our national debt.
Economic Sabotage
All told, the data tell us that a debt-ceiling standoff is an act of economic sabotage. The only way to avoid this conclusion is to argue that consumers and employers were reacting to some other economic factors. But the debt ceiling was the dominant economic story at the time. No other news fits the data as well. Although the European debt crisis was a rising concern throughout 2011, the real trouble in Europe arose in the period when consumer confidence and employment were recovering.
The next debt-ceiling battle could be worse, because the stakes are even higher. In addition to the threat of default, the U.S. is facing the so-called fiscal cliff: a raft of spending cuts and tax increases that will happen at the end of this year unless Congress acts to postpone them. Another stalemate would almost certainly plunge the economy into a deep recession. Our best alternative -- in fact, our only hope -- is for Congress to set aside partisan politics and work together with a common goal of helping our country out of the Great Recession.
I also get the feeling that global economic collapse is not that far away. A debt based monetary system seems to work quite well until there's too much debt.
This whole US fiasco will continue to highlight the unsustainable path that the US is on. If they just keep quiet they could keep kicking the can for a few more years yet.
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