The US remains a leading economy.

Sunday March 17, 2013

The fiscal cliff which saw markets get nervous towards the end of last year was not averted per se but delayed. On 1 March, across the board budget cuts came into force due to congressional leaders failing to agree to an alternative budget – these cuts are known as the “sequester”.

On 31 March, the US Congress will again need to lift the federal government’s debt ceiling (in laymens terms ‘raise the credit card limit’), at the same time Medicare cuts from the sequester will take effect. For the sake of brevity these issues will probably come to a head in August when Treasury will run out of cash if nothing is agreed to. We place little probability that it will come to this, however during this time these issues may cause market volatility as they negotiate the details. We remain relatively relaxed that the U.S. will be able to address these issues over the medium term.

With little prospect of help from the politicians in Washington the Federal Reserve late last year committed to buy $US45bn of long-dated treasuries each month with the intention to keep the Federal funds rate at an exceptionally low level until US unemployment rate is below 6.5%, as long as inflation is no more than 2.5%. It is worth noting that this is the first time in a very long time that the Fed has explicitly tied short-term rates to a specific level of unemployment.

This is on-top of the September money printing announcement – known as QE3 for those of you following the acronyms.

There has been concern from some members of the FOMC (the people that make these decisions) that these policies could encourage risk taking as well as adverse consequences for financial stability, namely inflation. Without wanting to be controversial, we believe that the US is happy to have inflation as a consequence – as this is very helpful in reducing the “real” value of their debt burden.

On a positive note, the economic data coming out of the U.S. continues to be encouraging. Longer term there are some exciting developments taking place. To touch on a couple of major ones, manufacturing is experiencing a revival due to the lower labour costs, a weaker US dollar and cheap energy.

The shale oil and gas revolution taking place has US oil production at a 20 year high and the International Energy Agency believes the US will become the world’s biggest oil producer by 2017 and energy independent by 2035. This is a potential game changer both economically and geo-politically.

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