The American way

Wall Street was closed last night for the Memorial Day holiday, but an interview on last night’s 7:30 Report with Harvard Business School professor and noted historian Niall Fergusson has had me thinking a lot about the future of the US a lot in the last 24 hours.

While the world is watching the debt situation in Europe very closely right now, Fergusson argues the problems brewing in the US economy could be even more troubling.

He argues the US is “on track to have an absolute debt explosion over the next 30 years unless there’s radical change that could take the debt-to-GDP ratio up above 400, maybe as high as 450%. On some projections, the Federal Government ends up spending its entire tax revenues on interest payments within 30 years.”

And while he doesn’t believe that is going to happen, he does say the US in on an “unsustainable fiscal trajectory”.

“The only thing that really stops people taking fright is the default assumption that the US is a safe haven, and when stuff goes wrong in Europe or anywhere else for that matter, you pile into US treasuries, because they’re the risk-free asset. Now, I think that assumption can get the US a certain way down the road before we start asking questions about fiscal policy, but it can’t go on forever.”

Scary stuff. As Fergusson went on to say, the idea of the US adopting austerity measures like those being forced on Greece and Spain is almost unimaginable, but that’s what it will get to if the economy doesn’t turn around.

One way the Obama administration is trying to turn around the economy is by supporting small businesses, and specifically giving direct assistance to help entrepreneurs access finance.

One program, run through Small Business Administration agency, has seen the Government spend just over $US1 billion to provide guarantees on small business loans and reduce borrower fees.

Since the start of the program in February 2009, these programs have supported more than $US27.5 billion in lending to more than 60,000 small businesses across America. The loan programs – and specifically the guarantees – have also brought 1,300 lending institutions back to the SBA’s loan programs.

The loan program has been extended four times after its original funding ran out and now the SBA needs some additional funds to keep the programs running until September. Both sides of Congress are supportive, although some political wrangling appears to have slowed down legislation needed to support the extension.

This direct action in the US, which has been mirrored by similar action across the OECD, is in stark contrast to the Australian response to the SME credit squeeze.

As was reinforced last week at a special CPA roundtable, Small Business Minster Craig Emerson believes encouraging competition in the banking sector is the best way to solve this problem, and argues direct action such as government guarantees for small business loans could create a “moral hazard” and distort the market.

But simply “encouraging competition” won’t lead to any short-term improvements for SMEs battling to get finance – and with the current turmoil in debt markets making overseas banks nervous about expansion, in reality it could be years before new entrants arrive in Australia.

While Australia’s economy is thankfully in a very different place to the US economy, the success of the American program should be studied by Emerson and his team as a real option that could be considered, if only in the short-term.


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