In 1992, Bill Clinton was elected the 42nd President of the United States. At the time, the federal deficit totalled $290bn (4.7% of GDP) and the new President had promised to radically reform the state and reduce by half this deficit that was unsustainable over time.
Six years later, at the start of his second term and after the Balanced Budget Act was voted in (a kind of “golden rule” ahead of time), the most optimistic plans were ahead of schedule and execution of the US budget was becoming positive. However, in 2000, a hitherto unseen and massive surplus of $236bn was presented, accounting for 2.4% of GDP.
The budgetary virtuousness then implemented in the US – supposedly lasting – led the very serious and highly respected Congressional Budget Office (CBO) to forecast in its central scenario, the total disappearance of US debt between 2009 and 2011.
Nothing more was needed to immediately trigger panic buying on the US long-term debt market in view of the future disappearance of this asset. If US government debt no longer existed, where would the huge surpluses generated by trade partners to the radiant US be placed “risk free”?
During this period, a Treasury Bond peak took place, like later on there was an oil peak (2008), and a silver peak (2011). In each case, the peak implies the same thing:” buy now – soon there’ll be none left”.
From this viewpoint, 11 years later, investors can rest assured. With or without a triple-A rating, US debt is actually no endangered species… Quite to the contrary, it is even tending to multiply rapidly and regularly hits its regulatory cap when it grows too quickly. After the budget deficit of $1.285bn in 2011, US debt currently represents 90% of GDP, far from the 10% in credit planned by the CBO 12 years or so ago.
In the words of Pierre Dac*, “the art of forecasting is difficult, especially when it concerns the future!”.
In 2008, the greenback was in for a particularly sluggish future and the euro was trading at $1.6 fallen dollars. It was just as clear that the euro/dollar parity would rapidly hit $2 for €1. This was scary for everyone and especially our corporate heads who were obliged to build budgets and forecasts based on these figures which often caused excessive panic.
The excellent Christmas present for 2011 was that the euro finally fell below the $1.30 mark and that European companies suffering from external restrictions for several years now (strong euro, hike in commodities prices), are set to benefit from increased competitiveness during these periods of sluggish growth. This is good news contrasting with a backdrop that remains difficult for European corporate leaders. Consumer purchasing power is set to come under pressure in 2012 whereas the states will have no leeway to shake up the economy and unemployment is rising. A dismal picture that prompts no optimism!
So what should companies do in this period of uncertainty? As always, project leaders are set to prepare themselves for all possibilities, even though they know deep down that the reality will be quite different. Moreover, a lack of visibility often enables the best projects and the best managers to stand out from the crowd and produce a batch of welcome surprises. When yields are threatened, risk-taking can pay off better and is better remunerated. Unpredictable 2012. And what if this was the best news of the year?
Didier LE MENESTREL
With Olivier de BERRANGER
*French actor and humorist (1893 – 1975)
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