USA is doing better with a blocked Government

An optimistic news on US public finances suddenly appeared - the government deficit is going down. For 2012 it will be "only" $1,21 trillion, instead of planned $1,33 trillion. Obviously the general trend of progressive increase of the US debt is continuing and still USA is on a road to entire financial catastrophe. But it is interesting to find that Obama will add a little less new debt than expected.

The main reason of this is the stalemate in The Congress that blocks most of new spending ideas of the Government. Obama is making some plans, they crash in Congress and Obama is postponing them for the future. Just like now - with no congressional support some plans were postponed for 2013 and that increased the expected deficit for the next year. And decreased the deficit for 2012.

It is not clear if next year there will be no stalemate. So it is possible even then to see a decrease in the deficit. Just like this year in February the expectations were for $1,33 trillion of deficit, but the real result will be much less.

The situation in US is confirming a joke that appeared in last years, that with non-working government the country is developing better. This joke was provoked by a more than a year stalemate in Belgium Parliament that left the country with no government. In this period the economy was doing very well and even with interim government Belgium avoided the financial crash that happened to Greece, Portugal and Ireland. This happened although Belgium is also deeply indebted and has much reforms to implement.

So with no government Belgium was unable to spend too much and to experiment with new ideas of wasting money. As a result in the shaking Europe, the generally risky Belgium was doing relatively well and this inspired a joke that with no government a country is doing better that with a real government... :)

The same is happening now in US. The Tea Party dominated House can not negotiate any mid or long term consensus with the Democrats dominated Senate and with the White House. So in the country is happening nothing new. As almost all new ideas of bureaucrats that run the government are for more spending, so the stalemate simply means no new spending... :))

If this situation continues, it is possible to see even further decrease in deficit as some automatic spending cuts and tax increases are planned for next year in case nothing else is decided till December.

The most expected scenario after elections is the stalemate to continue with Republicans keeping the House, something like 50:50 in Senate and Obama keeping the White House. Even if Romney becomes a President this will not be a great change as he is almost the same politician like Obama. The fact he is formally a Republican does not change the other fact - that in past he has done exactly the same what Obama is doing now.

But even if we see a real change in White House (for instance the fantastic scenario with Ron Paul becoming President) this will not break the stalemate, as no party will have 60 seats in Senate - needed to overcome the filibuster defense of the opposition.

So in December we will have no generally new political situation. I think Republicans will keep the majority in the House with losing some seats in favor of democrats. The Senate will be balanced or almost balanced with Democrats losing some seats. And the President - whoever he is, will be in a very weak position after winning by a small margin. So the stalemate will be guaranteed additionally and in long term.

This will mean the government will not be able to make serious spending increases. So if in the same time the economy is having some (even weak) growth, this generally will decrease the deficit.
Will this help USA to avoid the default? This is not sure. Although reduced the deficit is still very huge and the overall debt is increasing constantly. USA needs not just a stop in spending increase, but real and significant spending decrease, i.e. spending cuts and austerity. The negative side of the stalemate is that serious spending cuts and reforms are also blocked.

Dobri
July 29th 2012

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