America must brace itself for turbulence

From The Financial Times.

By Peter Orszag


America is experiencing the hard slog of recovering from the financial crisis. Prospects have turned more positive over the past two months. But a year ago growth was picking up too – and then it stalled, at about the same time Greece’s fiscal problems infected the global economy. The question now is whether a home-grown fiscal crisis could derail this year’s rebound.

Some analysts have reached dramatic conclusions, suggesting the near-certainty of hundreds of billions of dollars in government defaults within the US over the next 12 months. Such predictions will undoubtedly turn out to be substantially overblown. Yet the rejection of one extreme is not the affirmation of the other. International investors would be wise to pay close attention to fiscal trends within the US...

...The bottom line is that there may well be US public debt tremors this year, both during federal debate over raising the debt ceiling and with at least a limited number of crises in local and city governments. The bigger problem, though, lies beyond 2011, as the unsustainability of the federal government’s fiscal trajectory becomes increasingly clear. I hope it does not ultimately require a crisis to restore fiscal sustainability at the federal level, but I fear it will.


The writer is a vice-chairman of global banking at Citigroup and former director of the US Office of Management and Budget under Barack Obama


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