Plenty of reasons to expect a horrible US economy in 2013 and 2014

It is an unpleasant but unavoidable truth that the prospects for the US economy in 2013 and 2014 are particularly horrible, not something that too many politicians are willing to raise in this presidential election year. Negative comments win few votes. People only vote for what they want to hear.

So democracy is spinning an ugly con-trick this year. The truth is not out. The US economy has been spending way beyond its means. Much more has been spent than earned in increased GDP since the 2008-9 recession. The recovery has been very expensive and it has all gone on the tab.

Debt ceiling

Sometime towards the end of this year the US will bump up against the top of its $16.4 trillion federal government debt limit. Remember the angst that raising it caused in Congress last year and how markets fell as the risk of an unthinkable US default rose?

It worse this time because Congress is also facing a so-called fiscal cliff of expiring tax cuts and automatic public spending rises. In addition, for any newly elected or re-elected president the time to get the bad stuff done is in the first two years of office.

Certainly this is going to be a painful debate. There are plenty of folk who already think a 115 per cent debt to GDP ratio is far too high. This is borrowing from future generations to meet social payments today.

Then there is the practicality of federal borrowing on such a scale. At what point does this debt become unsustainable and result in higher interest rates and a devaluation of the US dollar? Many commentators think the dollar is set to tumble after the US presidential election, sending gold prices to the moon.

ArabianMoney has recently contributed to ‘The Little Book of the Shrinking Dollar’ published last month.

Market forces

What usually emerges when democratic politicians face painful decisions is a lot of blame reallocation and a fudged compromise. That might not be enough this time to prevent the markets taking their own course in terms of correcting these spending imbalances.

However that would mean an awful lot of collateral damage for the economy and by extension investors in US assets. Indeed, the smart money is already probably quietly leaving for safe haven assets like precious metals, art, real estate and other real assets where prices are not too inflated by prior monetary expansion.

The only thing supporting US asset prices at the moment is the unattractiveness of the eurozone as an alternative and the exit of money from emerging markets. That could also reverse out as the year progresses.