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The U.S. fiscal position is a house of cards that is becoming increasingly unstable, according to the latest Boekch Letter (via Paul Kedrosky).Not much of a surprise, but the details of how impossible it is for the U.S. to escape this position may shock:
The fact is there isn’t much to cut, compared to say, 1945 when debt was very high but massive wartime military expenditures were set to collapse. Third, successful fiscal consolidation programs usually involved steep currency devaluations and sharp interest rate declines. The U.S. cannot easily generate a significant dollar depreciation given its reserve currency status and need for massive foreign financing of its budget deficit. Neither would other countries welcome a large drop in the dollar while global deflationary pressures are acute. Lowering interest rates is also not an option. Short rates are close to zero and long rates are about two standard deviations on the side of being too low. Growth is the key but there is no magic bullet there. The U.S. is in a long wave decline, it is deleveraging, its population is ageing and the deficit is crowding out private investment.
The author is so pessimistic, he sees no trading “edge” in this environment and recommends cash.