Now I’m a long way from being an economist, but has the world really changed because the Americans have dredged up, under pressure, a tiny piece of sticking plaster to put on its so called ‘fiscal cliff’. Certainly a little bit of money will be raised by these small tax hikes, and maybe this is the start of the of reduction of the five trillion dollar national debt. However without significant cuts in the state expenditure it will not even make a dent in this mountain of debt, so I’m guessing that in two months time, when these cuts come up for discussion again, we are going to be subjected to the same nail biting drama and I would not like to bet the family silver on the outcome.
Another question is how important is this mountain of debt to America’s financial survival – is it just an academic number? As long as America can service the interest repayments and continue to roll the debt over then does it matter – as long as their bonds can be bought and sold, then who really cares? Certainly Charles Dickens and the Victorians would have viewed the situation with deep disapproval, but perhaps in today’s world it’s not so important. Maybe America will be able to reduce its debt in other ways as its economy improves.
The last couple of years have certainly produced some positive turn arounds. The most incredible being that America could shortly become an exporter of oil and gas and not an importer. A most remarkable financial bonus in its own right. Its citizens have also been paying down their personal debt at a rapid rate which, when completed, will lead to a lift in spending in the shops and another boost to the economy. Many products have been repatriated back from Asia to be manufactured in the homeland, lifting employment which is rising month on month with the corresponding rise in tax payments. Consumption of fossil fuels and energy is being reduced with the acceptance of more efficient car engines and a general public awareness of green issues – yet more money to be freed up for more productive expenditure. Housing prices may in some places have further to fall, but new house build figures have started to rise which is a boost for the construction industry and employment. So how bad is this debt? Maybe a few minor cuts in State expenditure will make a point, but possibly a combination of inflation and time will bring about the healing process.
As a DIY investor it must now be time to keep a careful watch on how the American economy goes forward over the next year. For myself this will be revealed in the performance numbers of the American funds. Until they start to rise it is all just noise and I will sit on the fence. I would liken it to a similar situation over the last six months with gold and gold funds. The whole world and his dog have been advocating the purchase of this commodity in both of these fashions. Nobody would or could sensibly argue against the logic of the case – it all made sense. Yet if you had followed this advice you would have watched your investment lose twenty percent or more. Sorry to raise the name of Jesse Livermore again but he would have told you not to back your hunches until the market confirmed the hunch was correct. Possibly American funds are yet another example – let’s wait and see.