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Decimal Digest
18 Apr 2011

US Rating Downgrade and the Oncoming Fiscal Squeeze

Yesterday, the rating agency Standard and Poor downgraded the outlook on the US debt to negative, while maintaining the rating at AAA.

The market participants, by and large, fully appreciate the need to bring in fiscal discipline back in the US economy. It would be interesting to see what the current plans are, and how these plans will affect the economic performance of the USA.

The chart below shows the change in fiscal deficits over 5-year periods as a % of GDP.

The chart is based on the plans by the White House. Based on the current plans, during the 2011-2016 period (the last point of the chart) a fiscal contraction of 7.6% of GDP is expected. This is unprecedented. The biggest fiscal squeeze was achieved in 1994-1999 period of nearly 4.6% of GDP, and as all of us remember that the capital gains from a booming stock market was one of the main drivers for improvement in the fiscal position during 1994-1999. In other words, that instance of fiscal contraction was a result of a booming economy.

It would be interesting to watch how this fiscal squeeze affects household spending, consumer confidence and business confidence in the coming years.


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