Keep an eye on the US, as its spendthrift ways could yet decide whether our finances sink or swim

Share this article
Have your say

RECENT years have underlined the veracity of the classic market mantra that “if the US sneezes the rest of the world gets a cold”

When Standard & Poor’s downgraded US debt last year we all saw the instantaneous impact on our investments.

This impact not only affected private investors but also created headaches for pension fund managers, who were already in the difficult position of managing the financial futures of many at a time of immense market uncertainty.

As we head towards 2013 it is widely accepted that cutting debt and spending is the vital action need to finally stabilise national and personal finances. Until then we are merely kicking the can down the road.

The problem, however, is that the power to resolve the debt issue lies in the hands of politicians, something which makes the ­markets even more worried.

What makes the problem more difficult for UK citizens is that in the future the challenge rests not with those that we elect, but those we don’t.

As the US again finds itself in a position that could damage our personal finances, thanks to what is called the fiscal cliff, it is essential that we in the UK fully understand the situation in the US so that we can do what we can to protect our own personal finances.

Amounting to the potential moment when automatic and dramatic changes to US spending kicks into place the fiscal cliff is the result of the inability of ­Democrats and Republicans to agree on new economic measures before the 31 December deadline.

What would follow is a ­radical shift in current US policy, with significant tax rises and spending cuts being put into place thanks solely to the date changing rather than a political or economic ­decision.

It’s seen by many as a plunge into the unknown, but in truth the fiscal cliff is nothing of the sort.

If the US fell off it, government growth would be checked, ­perhaps reversed and in the ­short-term there would be a pull back on money supply as public sector expenditure shrank.

The UK and Germany would call it austerity. It would be a first step towards fiscal continence, a small move towards less horrific deficits.

Instead it has been named as something disastrous rather than a needed change in course. It underlines that the US is in fact past the point of economic no-return.

Developed world governments are sucking out the assets of their countries via “financial repression” to pay for their public sector and their trade deficits.

This ‘hollowing out’ of an ­economy’s productivity and wealth has an eventual end-point.

As the whole sorry mess revolves around the US, the ­question becomes, can Obama see out his four years before the roof ­collapses in on America’s dissipating, ­spendthrift ways?

It will be a close one and is something we must pay close attention to if we want to secure our own savings and pensions.

Yet whether Obama wants to spend like a sailor or not, the other branches of the US government are likely to keep doing so anyway. It’s just a case of when the world will stop giving out credit.

As such, the warning signals will come in the form of a sliding ­dollar and corresponding gold and oil rallies.

This will precede a spike in US interest rates and this will then feed itself into the market and we too will feel the impact.

When you see these signs, you will know trouble awaits just over the horizon.

• Clem Chambers is chief ­executive of stocks and shares website