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We prefer the first scenario for the United States. But we are ashamed to admit the politicians, including Republicans, are likely to aggravate the problems until we face disaster.
The United States’ creditor is China and the rest of Asia. It is projected that the U.S. trade deficit with China could hit 270 billion dollars for the entire year of 2010. The Chinese government has accumulated approximately $2.65 trillion in total foreign exchange reserves. They have drained this wealth from the economies of other nations such as the United States. Instead of reinvesting all of it, they are just sitting on much of the booty. This creates tremendous imbalances in the global economy.
The fiscal situation is much more desperate at the local level where these governments cannot depend on Chinese money to balance the budget. Incoming governor Jerry Brown is scrambling to find $29 billion more to cut from the California state budget. Brown’s assessment of the desperate condition of California state finances is sobering: “We’ve been living in fantasy land. It is much worse than I thought. I’m shocked.”
Detroit Mayor Dave Bing wants to cut 20 percent of Detroit off from essential social services such as road repairs, police patrols, functioning street lights and garbage collection. The second most dangerous city in the United States – Camden, New Jersey – is about to lay off about half its police in a desperate attempt to save money.
Last month, the U.S. government budget deficit increased to a whopping $150.4 billion, which represents the biggest November budget deficit on record. Somehow, the government will roll over existing debt and finance new debt that is equivalent to 27.8 percent of GDP in 2011.
Economists mostly agree continued spending on unemployment benefits is retarding the recovery. Employment restructuring will be more orderly and create less chaos if it happens sooner rather than later. This situation is worse than most understand, and more spending is only exaggerating the pain.
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